8 pref then 70/30, but the overrun clause is doing all the work

I'm nowhere near writing a 300k check but I've read enough of these to ask: does the agreement say anything about who approves the budget, or can he revise it unilaterally? Because a 2x dilution penalty on capital calls is a completely different instrument depending on whether he needs your consent to declare the call.

The thing I've learned about people who need signatures by a date is that the date is almost always more flexible than they say. Five years in a service business taught me that much. Lot contracts get extended. Sometimes for a fee, sometimes for nothing.

Test it. Tell him you need two weeks and one change. If the whole deal collapses because you asked for time, you found out something for free.

The missing lien waiver requirement would worry me as much as 4.3. If subs aren't signing waivers as they get paid, you can pay for the same work twice when a mechanic's lien shows up after the fact, and lien rights and filing windows differ by state. Ask what the lender requires, because a lot of construction lenders require waivers regardless of what the operating agreement says.

Underwrite the deal without the documents for a second, because the docs might be moot.

1.24M budget, 780k debt, 620k equity, so 1.4M of capitalization against a budget of 1.24M. That extra 160k, is that the lots, or soft costs, or is some of it a fee to him? You didn't mention an acquisition fee, a construction management fee, or a development fee, and a builder doing 1.24M of work for 30 percent of the back end and a 40k contribution is unusual. Either there's fee income you haven't found in the docs, or he's marking up hard costs internally through an affiliated entity. Find out which. Affiliate transaction language is usually in a separate section from the waterfall.

Then the exit. What are the two houses supposed to sell for? On 1.24M of cost you need something like 1.55M combined to make the 8 pref plus a real 70/30 split worth the risk, and that's before commissions and carry. If his comps are last summer's closings and the submarket has softened, the promote is theoretical and you're taking construction risk for a preferred return that a much simpler instrument would pay you.

On your question: the personal guaranty. Everything else is negotiating around a bad outcome. The guaranty is what makes him care about the bad outcome.

3 percent contingency on ground-up in this cost environment is the number I'd reject on. Not the dilution clause, that one. Residential material prices have been running above 3 percent a year on their own, so a 3 percent contingency is consumed by ordinary inflation over a 12 to 15 month build before a single surprise happens. Tariff exposure on steel, aluminum and lumber has made the timing of those increases unpredictable too.

I'd want 10 percent, so call it 124k, and I'd want it in the budget and funded at closing rather than available by capital call. That single change makes 4.3 much less likely to ever fire, which is a cleaner fix than negotiating the penalty down.

@sextant is right about the fee question though. Run the sources and uses yourself and see if it balances.

Two adjacent lots also means one absorption market. If house one sits, house two sits, and your capital is stuck behind both. Worth asking whether he intends to build them sequentially or in parallel, because parallel is faster and much less forgiving.

I read this whole thing looking for the part where you get paid without a second job and I don't think it's here. 8 percent pref with construction risk, a dilution clause, and no personal guaranty. I'd rather have 6 on something boring.

On the completion guaranty being from the LLC to itself, that's not always meaningless, but the qualifier matters and it depends on how the entity's obligations get enforced in your state, so a real estate attorney in the state of formation should read it before you sign. Practically, a guaranty from an entity whose only asset is the project it's guaranteeing gives you nothing when the project is the thing that failed.

What I'd add from running crews: ask for the subcontractor list and the signed contracts, not bids. There's a big difference between "my framer quoted 46k" and a signed contract with a start date. In a labor market where nearly every contractor reports trouble filling positions, an unsigned framer is a schedule that hasn't been made yet.

He needs your money by the 30th because his lot contracts expire, which means he doesn't control the land yet. That's the weakest possible moment to be asked for a signature, and it's also the moment you have the most leverage you'll ever have in this relationship. Use it now or you won't get it back.

Still learning how private capital moves, so a question rather than a point. If @fathom gets the personal guaranty but leaves the 3 percent contingency alone, doesn't he end up with a sponsor who'd rather cut quality than trigger a guaranty? Seems like the guaranty changes his incentives in a direction that isn't all good.

@sable that's a real effect and it's why lenders pair a completion guaranty with plan and spec requirements plus inspection sign-offs. The guaranty makes him finish, the specs make him finish correctly.

@fathom, one thing from the lending side of these. Ask to see the lender's commitment letter, not the sponsor's summary of the rate. Construction lenders typically require the borrower's equity in first, so if 620k of equity has to be spent before the 780k starts funding, your 300k is at risk for months with nothing drawn behind it. Also check whether the lender already requires a personal guaranty from him. If they do and the operating agreement doesn't, you can ask why the bank got protection you didn't. That's an easier conversation than asking for something new.