Traded my electrical labor at cost for 8% of a 7,200 sf retail shell

Small three tenant shell on an outparcel next to a grocery-anchored center, secondary market. Total project cost came in at $1.9M. I've wired a lot of these for other people and this time I asked the developer whether he'd take my work as part of the equity instead of just paying me.

How it got structured. My scope bid at $184,000. I billed the job at $151,000, essentially my cost plus a thin overhead line, so I contributed $33,000 of value there. Then I wired $20,000 cash. $53,000 total against an equity stack of $665,000, which is 8%. Loan covered the rest at 65% of cost.

14 months from permit to certificate of occupancy. The thing that nearly killed it was the utility transformer. Quoted at 20 weeks, we were told at week 18 that the order had been placed against the wrong spec, and the replacement order pushed us out another 31 weeks. We ran temp power for the interior work, which cost about $14,000 that came out of contingency, and the certificate of occupancy slipped four months. Two of the three tenants had lease commencement tied to delivery of their premises, so their clocks moved with us and nobody paid rent for those four months.

Building is full now. All three tenants NNN, two national franchise operators and one local. Developer refinanced into permanent debt at month 17 and I kept my 8%. First full year distribution to me was $9,400.

What I'd keep. I paid an attorney $2,800 to read the operating agreement before I signed, which felt absurd at the time on a $53,000 position and was the best money in the whole deal. What I'd change is that I'd have priced the transformer risk into the schedule myself, since I'm the one who knew that lead times had gone stupid and I said nothing.

3 replies

2ehernandez74PO2BPRO5

Congratulations, genuinely. What I'd want to know before I copied it is the downside case. Suppose the third suite sat empty for two years instead of leasing. Was there a capital call provision, and would you have had to fund 8% of the carry or get diluted? And on the four month delay, who ate the extra loan interest, was there enough reserve or did the developer write a check?

I hold things a long time and the question I always end up asking is what happens if the good outcome is 30 months late rather than 4 months late.

1hannah_west29 Get yours

Your arithmetic checks. $1.9M at 65% is $1.235M of debt and $665k of equity, and $53k is 7.97%. So you were credited at par, which is the interesting part. You took construction period risk on $33,000 of unpaid labor with no promote and no preference, and you got the same dollar treatment as the guy who wired cash on day one. The developer got your scope 18% under market and gave up nothing for it.

I'd have asked for either a preferred return on the contribution or 10% for the same $53k, on the grounds that a sub who shows up on schedule is worth more to a 14 month build than passive money is. Whether he'd have taken it, I don't know.

Other thing, $9,400 on $53,000 is 17.7% on your basis in year one, which is a good number and is partly an artifact of the discount you gave yourself going in. On the developer's cash basis the same building is yielding something much more ordinary. Worth knowing which number you're looking at when the next one comes along and someone quotes you a cash on cash.

Traded my electrical labor at cost for 8% of a 7,200 sf retail shell

3 replies