What % Should I Put Into My Project &amp; What % Should I Keep?
Happy Friday everyone.  

So, you want to be a developer.  You've got an idea of what you think should be built.  You know you need to raise money for the project, but how much should you raise?  How much of the project should you give to your investor(s)?  

I get asked how I structure my development deals, how much money I put in as the developer, etc.  This is a very popular question and time and time again, I hear that it's "deal specific" and "no two deals are the same," (as if they are snowflakes, right??) and the responses go on and on...but that's just bullshit.  There is generally a good way to structure your development deals and I will show you how, now. 

First, for most deals, you will likely be able to raise 75% of the total costs (Loan to Cost, LTC) as a construction loan.  Usually, you can't use this money to buy the land, but there are some exceptions.  This means that you need to come up with 25% of the costs, to secure the land and take care of some soft costs (planning, permits, etc).  So how do you get that 25%?  You may need to raise it.  But even still, investors are likely going to want to make sure you have some skin in the game.  Typically, a developer may need to have 10% of the equity amount in their deal (that's 2.5% of the entire costs).  The rest you could raise.  You may also find someone who has land and convince them to contribute the land to the deal for a piece of the ownership.  But how much ownership should you give to the land owner?  How much do you get yourself for putting the deal together and developing it, for your sweat equity?   And if you put in money yourself on the deal?  

In general, for putting in the sweat equity and doing the development work (not assuming you're the GC also, just the developer), then you should be getting a 30% promote.  What I mean by that is without putting in a single dime, but for putting in all that hard work of getting the deal together and getting it to the finish line, you deserve 30%.  If you're new, you may have to take less.  But if you're a seasoned vet, you really shouldn't accept a deal where you're getting less than 30%.  This means from the remaining costs, the economic portion is 70% of the project.  If you put in half of the equity costs of the deal, you should get half of the economic portion.  That would be 35%.  So now you have your 30% sweat equity promote and 35% from the economic portion, leaving you with a total 65% ownership of the project.  

When you create your SPV (special purpose vehicle, a company that's sole purpose is to own the land and the development, allowing you to give ownership in the deal to raise money from investors), you will own 65% of the project.  This would be written out in your operating agreement and complimented with a subscription agreement to those units, formalizing the fund raising.  Your attorney will need to help you here (do not do this alone and try to save a few bucks...get your attorney in here!!).  In your operating agreement, you can split the shares/units of the company into different classes if you like (A and B) to differentiate between investment shares and sweat equity shares, but that's a discussion for another post.  And that can get complicated with you are also uses different classes for voting units vs. nonvoting...but again, another discussion for another post. 

I've put together an example model for you to see how this works: 

[https://imgur.com/a/Bl2YLip](https://imgur.com/a/Bl2YLip)

In this scenario,  we have a 75% LTC construction loan.  So 25% of the ENTIRE cost is the equity.  As a developer, I get my 30% sweat equity promote on the deal.  That means that 70% of the ownership is for anyone that brings in the money that we need (which is 25% of the whole cost).   If I bring in half of the equity need amount, I  would then get half of the ownership of the investment portion (since that's 70% in total, half would be 35% of the deal).  This is how I own 65% of the deal.  If I raise the rest of the money or get land contributed to me, I would give them their % ownership.  If I chose to NOT put in any money, then I would just keep my 30% promote and leave it at that, giving anyone investing in the project 70% of the deal.  

This is really just a starting point, a guide for you.  Once you know what you're trying to develop and what your costs are, what you're able to put into your project vs what you will have to raise funds for, now you can adjust the amounts.  For example, you can offer a preferred equity position to your investors and give them a 5%-10% return (depending on the amount of the money you need, how badly you need it, how long you think you will need it for, etc..).  I generally do an accrual basis for this and I keep it around 6%.  This means that during development and lease up, the invested portion in the project (anything that is left from the invested amount) is accruing at a 6% annualized rate.  Most of my deals are not compounded, but that 6% is only on the amount that was invested originally and if I've returned any portion of that investment, then 6% is accrued only on the amount left.  Once the building is operational and it is paying its debt service, taxes, etc, but before it pays out any income to shareholders, there begins a repayment on the accrued portion.  You can put in details to make it such that there are limits to how much a quarter/year you want to pay back, a waterfall of limits, etc.  Sometimes, I structure deals so that the equity is also paid back.  In some deals, it is straight equity (they buy their ownership and they don't get their money back, but they just own their % of the company).  You really can bake this this cake most any way you want.   

If anyone has any questions, please let me know.   Hopefully, you now have a bit better understanding on how a development deal should be structured.  

Also, if anyone has sent me a message but I haven't read or responded yet, I will be doing so soon!!  I've got an inbox here of double digit messages and a chat box with the same...sorry for the delay but I will respond to each and every one of you over the weekend and next week!!  Thank you for your patience. 

Best,

\-HYD-
[{"id": "gm5vrqz", "text": "This is absolutely brilliant and I thank you very much for sharing it.", "replies": [{"id": "gm6fue7", "text": "Absolutely!  Enjoy!!", "replies": [], "depth": 2}], "depth": 1}, {"id": "gm5z4ol", "text": "Thank you for putting that together. If I\u2019m a wannabe developer but don\u2019t have the cash to take down land how could I structure a joint venture with a landowner? I\u2019m a GC and looking to do build to suit or spec development.", "replies": [{"id": "gm621zy", "text": "Great question!  I'm a little short on time at the moment, so I will come back and add more detail to this soon or answer any other more specific questions you might have from this comment I'm posting now, a little later.  But here's where I would start:\n\nWhat are you building?  Let's say you're going to build something and it's going to cost you $10m.  You know you can get a construction loan of 75% LTC, so that means you only have to worry about the $2.5m in costs.  Now, most investors and partners would want you to have about 10% of that equity in the deal, so if you have $250k, now's the time to start putting it to use.  Now, you know the land owner.  Figure out what their property is worth and give them a little premium on value.  Tell them you're valuing it higher and that you would like to do a deal with them.  From the $2.5m, let's say the land is $500k.  This means that they are 1/5th of the amount you have to raise for equity.  This would also be 1/5th of the 70% of the project (because remember, just for doing the development work, you should give yourself the 30% promote of sweat equity).  This means that I would offer the land owner 14% of the overall project.  But you can play with it a little bit.  Your 250k or 10% of the equity would also get you another 7% of the deal, so you would have you at 37% total.\n\nFigure out the value of the land, sweeten the deal a little bit for them, and offer the respective %. And remember, no one says no to a bad deal (if they were a serious investors and could do the deal, then why would they say no to a deal that works and makes sense?).  Ultimately, if you don't have any money to put into a project, then you will keep just the 30% (or less if you're really experienced and trying to sell the deal harder) and then give the land owner their respective portion still.\n\nAsk any follow-up questions you may have!\n\n&amp;#x200B;\n\nEDIT: Bad Math.  Thanks for the correction, u/bennyj72!", "replies": [{"id": "gm69qsi", "text": "Thank you but I got a little lost on your math. If their land is worth $500k wouldn\u2019t that be 20% of the required $2.5M equity?", "replies": [{"id": "gm6ew4o", "text": "Absolutely!!  Sorry - I was rushing and for some reason, I did the math off of 1.5m not 2.5m...so sorry!!  Yes, 100% correct.  It would be 20%.  Which means that we would give them 20% of the 70%, which is 14% of the company!!  I will fix my post.  Thank you for catching that!!", "replies": [{"id": "gm6kq5j", "text": "Thanks, appreciate you taking the time to explain that.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gm6hcsk", "text": "Very well done. Thank you.", "replies": [], "depth": 1}, {"id": "gm8hoz4", "text": "HYD, do you have any CRE development reads you\u2019d recommend? Thanks for putting this together btw!", "replies": [{"id": "gmj1ijo", "text": "Sure!  PM me.  I\u2019ll send you some material that helped me!", "replies": [], "depth": 2}, {"id": "goefqg1", "text": "Yes.  Respond to your PM!", "replies": [], "depth": 2}], "depth": 1}, {"id": "gm91nym", "text": "This was a fantastic write up. Thanks for sharing. I\u2019ve been interested in the financial breakdown of fundraising and how that equity and profit gets distributed. Would you mind breaking down the process of fundraising at some point? Was this family and friends round or do you reach out to investors you aren\u2019t familiar with? If the latter, how do you approach these investors?", "replies": [{"id": "gmnittx", "text": "Your investor could be a couple different people. They could be someone with a piece of land, that you can put a project proposal together on and submit, and then offer them X% of the overall deal based on the value you give them.  Your investor could also be someone that your CRE broker knows who is looking to invest.  I have met about 6 or so equity investors this way that came as referrals.  Also, rich people tend to have rich friends, so especially after a deal goes well and you have an exit (or if the projects are progressing nicely), ask them if they know of anyone else that might be interested in doing a deal with you.  In fact, I would say even if you want to pitch a deal to someone, just ask them if they know of anyone who would be a good fit for your deal.  Lastly, there are money people out there who are financial intermediaries and their whole job is to help you find the equity and debt.  Construction Debt tends to be 1-2% cost to the broker with another 1-2% going to the lender (unless you are going directly to the lender and you can save that but you need to have a relationship with them, or at least know what you are doing when you approach them!).  Equity costs a lot more, anywhere from 2% to 5% of the amount placed and then they may also ask for % of the deal.", "replies": [], "depth": 2}, {"id": "goefpfn", "text": "Sure.  The best way I've found to raise money is from high net worth individuals who have say 15m - 20m to play with and are just successful themselves, looking to get connected to a developer.  I don't like insinuation equity (it's not bad, but man their waterfalls and requirements and reporting strands are insane... but what would you expect?! They are institutional!).  \n\nTalk to your broker.  Don't have one?  Make friends with one.  Talk to them.  And treat them right.  In fact, McNellis (author of one of my favorite intro books to development) suggests you should give 5% of the deal to the broker as an extra thank you, after paying the full commission.  I can't tell you the number of investors brokers have brought us and they've invested millions upon millions in our projects.  They are worth it.  And if a broker gets full commission from you (and another developer has a broker license to save on the commission) who do you think is going to see the deal first? Or be introduced first to a potential investor?  The developer that treats the broker right.  \n\nIf you don't think you will get taken seriously and youre just getting started out, then that's when offering 5% of the deal that they help secure for you makes sense (as an incentive for the broker to take you seriously).  Keep in mind this works with smaller family owned brokers, not larger shops where they frown on that kind of stuff.", "replies": [{"id": "goeg2aj", "text": "One more thing to keep in mind, and I will be doing a full post on this, but do not give the 5% of the deal at the property ownership level.  Let's say that you own 50% of the deal and you gave away 50% of the rest of the equity ownership to raise money to get the deal to work.  Well, at this point, you should give from your half, 10%.  This way, your 90% will always trump the 10% and then you keep your power at the 50% level. However, if you give the broker the 5% at the deal level from your half, you now have 45% to you, 5% to the broker, and 50% to the investor.  If that 5% sides with the 50% investor, you're out of luck on voting matters (assuming votes power matches the ownership).", "replies": [], "depth": 3}, {"id": "goewj3d", "text": "Thanks a ton for coming back to this. This is extremely helpful", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gn1376g", "text": "Very well done.", "replies": [{"id": "goedr9y", "text": "Thank you!! I hope it gives some insight into how to structure deals!", "replies": [{"id": "goedw8v", "text": "Can I message you follow up with regards to my personal situation?", "replies": [{"id": "goeew7t", "text": "Yes. Please do!  PM me.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]