Funding may be structured in a number of ways:

• Senior Debt and Stretched Senior Debt 

• Land, SDLT, and other acquisition costs
• Construction costs
• s. 106 costs

•  Accrual for estimated interest
• 100% of the construction costs and professional fees

• Mezzanine Debt

This is 2nd charge or junior debt lending which ranks behind senior debt 1st charge lending in priority and as it carries higher risk it is priced accordingly. The term ‘mezzanine’ reflects the fact that it sits in between senior debt and equity (usually provided by the borrowing client). Mezzanine lenders may structure their loan based open the LTC or LGDV model. So for example they may lend up to 90% LTC or to 75% LGDV.

• Equity

Equity is the ‘debt free’ element of the funding structure and normally refers to the cash contribution made by the borrower. However it can be an investment made by a third party and structured in a number of ways to include a profit share, interest, fixed fee or other arrangement. Third party equity providers may require security by way of a 2nd/subsequent charge over the project asset (strictly speaking it is then debt not equity but this is splitting hairs), and/or a shareholding in the borrowing entity, but often it is unsecured. Equity is available for well-located and profitable projects, typically up to c. 90% of the equity requirement (that is the balance required to fund the project after the debt provision). For example let us assume that a project is leveraged at 80% LTC from a debt provider(s); then the equity requirement is 20% LTC. If an equity provider invests 90% of this requirement, the borrowing developer has to invest 10% of the 20%; that is 2% of the project costs. So for a project with a total cost of £5M, the developer contribution would be £100k, for a project with costs of £10M, £200k and so on. Whilst it is possible to leverage debt to 90% LTC it is unusual for it to be this high in a debt-equity structure due to the debt being expensive at this high leverage. It is more common for the leverage in a debt-equity structure to be c. 75- 80% LTC, thus attracting cheaper debt funding.

• 100% Funding

There are a few 100% structures for experienced developers with well-located and profitable projects. Investors may look for a return made up of a mix of interest, fixed fee or profit share arrangements.

The facility will be made available in two tranches:

Land Loan: for the purchase (or refinance) of the property/land and

It depends upon a number of factors including experience, risk profile, location, unit type, gearing and size of the project. What is certain though is that pricing is not, and is unlikely to be, as cheap as the pre credit crunch era. On the other hand the emergence of new entrants to the market in the last few years has brought much needed competition and the result is a reduction in pricing which is good news for the borrowing property developer.

Lenders will earn a return on their funds by applying a variety of charging structures to include:

• Interest: which may be charged on the drawn balance, calculated daily and compounded monthly, or it may be charged on the offered facility rather than the drawn balance. Some lenders, notably mezzanine lenders, charge interest on a flat rather than compounded structure.
• Non-utilisation fee: charged monthly on the undrawn element of the building loan. This is not particularly common.
• Lending fee in: calculated as a percentage of the offered facility or a fixed sum, either payable in whole, or part thereof, on acceptance of the offered facility or drawdown of the first tranche of funds.
• Lending fee out: charged on the repayment of the facility calculated as either a percentage of the facility, a percentage of the GDV of the project, a fixed fee or a fee based upon the profits generated from the project. Typically a fee is taken from each unit sale.

Most lenders, and certainly for larger schemes, will only lend to experienced developers who can demonstrate they have profitably built and sold a similar project to the one that they are seeking finance on.

However some lenders will consider applications from construction industry professionals, construction contractors or inexperienced developers on smaller schemes subject to the deployment of an experienced team to include a contractor and project manager. Inexperienced applicants should have a significant cash contribution and should not expect to be offered stretched senior debt to 90% LTC on a 50 unit scheme!

No not necessarily. Large and complex schemes will generally have a JCT structure but many small to medium sized developers operate by deploying sub-contractors and direct labour and managing the project themselves. This is usually acceptable to most lenders providing the developer can demonstrate experience and success using this structure.