An 8 pref and 70/30 split can look standard while an overrun clause does all the real work
A spec build joint venture structured around an 8 percent preferred return, return of capital, then a 70/30 split to investors reads as a standard shape on its face. Consider a two-house build, combined budget $1.24M, total equity $620k, construction debt $780k committed at a rate in the low 9s. The waterfall itself is unremarkable. What deserves real scrutiny is a cost overrun clause funding overruns through additional capital calls, where any member who doesn't fund a call within 15 days gets diluted using a 2x penalty multiplier on the funding member's contribution. When the sponsor is also a capital member, that structure hands one party both the ability to create the overrun and the ability to fund the call that dilutes everyone else at 2x, which is a meaningful conflict of interest worth flagging directly. A second common gap: a completion guaranty given by the project LLC itself, which is the same entity doing the building, functions as a guaranty from the borrower to itself rather than real protection. No personal guaranty from the sponsor and no lien waiver requirement in the draw language, with draws going out on the sponsor's own certification plus the lender's inspection, leaves the investor with limited recourse if costs run over. With materials still drifting and subcontractor pricing under pressure from commercial work, a contingency around 3 percent of a $1.24M budget reads thin against the real probability of an overrun. Of the available asks, a personal completion guaranty, a cap on dilutive capital calls, or a higher funded contingency at closing, the dilutive capital call cap is usually the one that most directly protects an investor's principal, since it removes the mechanism by which a sponsor could squeeze out a co-investor rather than simply making an overrun less likely.
