Finance for Property Developers & Investors

Finance for Property Developers & Investors

Equity, JVs & 100% Funding

Equity is the generic name given to highly leveraged Development Finance where an investor (and /or lender) receives a share of the project profits in return for their investment (and/or loan). The structure of the funding can take many forms.

Market Sectors

Residential (but refer to Forward Funding below)

Leverage

Equity is available up to 100% of total project costs (LTC), although this is in limited supply. More typically the borrower is required to invest a few percent of the project costs so they have some hurt money in the project.

Structure

  • Structures vary and there are no set parameters; each investor/lender will have their specific product, process and pricing.
  • Funding may be from a single source (with the investor/lender providing all of the money), two sources (equity slice sitting behind Senior Debt or Stretched Senior Debt), or three sources (equity slice sitting behind Senior Debt and Mezzanine Debt).

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  • Examples of currently available structures:
    • 100% funding from a sole source on a 1st legal charge. Interest is charged on debt and the remaining profit is split between the lender and the borrower.
    • Equity funding at 90% of the equity requirement. The equity provider will sit behind Senior Debt at 80% LTC. Therefore the Equity Investor will fund 90% of the shortfall of 20%, which is 18%, with the borrower proving 2% of project costs.

Pricing

  • There are no set rules for pricing of Equity, JVs and 100% Funding but typically the Investor/Lender will look for a return in one or more of the following ways:
    • Interest
    • Lending fee in
    • Lending fee out
    • JV or profit share which may be a fixed fee, a priority return, or a pre-determined split of project profits
    • A target Internal Rate of Return (IRR)

The pricing of Equity, JVs and 100% Funding has to strike a balance between providing the Investor/lender with a sufficient return to reward risk (clearly they are highly exposed as investing/lending at very high leverage) and ensuring the borrower receives a reasonable reward for their efforts in finding, building and selling the project. Projects must show a healthy profitability on paper to attract interest from Equity Investors / Lenders.

equity,-jv-and-100%-funding

Construction Type

New Build, Conversion and Heavy Refurbishment projects.

Location

England, Wales, Scotland

Planning Consent

Full Planning Consent must be in place or consent under Permitted Development Rights (PDR).

Borrowing Entities

  • Sole traders, partnerships, LLP’s, Ltd Co’s and offshore vehicles.
  • When the vehicle is to be a Ltd Co, lenders will often prefer it to be a Special Purpose Vehicle, or SPV, set up for the specific project and owning only the project asset.
  • Where the borrower is to be an offshore vehicle full disclosure and audit of the directors and beneficial owners is required.

Security

There are no rules on the security requirements for Equity, JVs or 100% Funding, but typically it will be one or more of the following:

  • 1st charge, 2nd charge or unsecured (strictly speaking, where security is taken for Equity Investment, this is debt not equity but it is commonly known as Equity).
  • 1st debenture, 2nd debenture or unsecured
  • Shareholding in the SPV borrowing vehicle
  • A JV profit share agreement
  • Personal or Corporate Guarantees (incorporated borrowers) maybe required by some but not all Equity Investors with the amount negotiable.

Equity / Loan Size

At Optima we broker Equity slices from £250k to £5M. For single source JV-100% Funding we broker debt from £2M to £15M.

Forward Funding

Forward Funding is a finance model where an institutional investor (for example a pension fund) contracts with a developer (either as land owner or where contract or option to purchase is held) to purchase land with planning consent and finance its construction. The investor retains ownership of the constructed asset as an investment. Commonly known as the Build to Rent Sector.

Market Sectors

  • Residential – Private Rented Sector (PRS).
  • Student Accommodation – PBSA.
  • Commercial – e.g. Hotel, Office.

Leverage

Typically 100% of the project costs.

Structure

A variety of structures but typically including;

  • The investor purchases the land before construction commences.
  • The investor pays the developer to build the asset in stage payments.
  • The developer may take an element of profit at land sale stage, throughout the build by way of a project management fee and as a bullet payment upon completion of the build.
  • The developer will appoint a contractor and all parties will enter into a JCT fixed price contract.
  • A pre let of the asset is often required (particularly for commercial assets) at the point of purchase of the land.

Benefits to the Investor

  • Access to often scarce off market assets.
  • Investment acquired at a price below what would be paid for on market constructed asset; thus improving yield.
  • Input into design of asset and delivered as a turnkey project by developer.
  • Savings in SDLT as paid on lane value, not GDV of project.
    Pre let of asset (if applicable).

Benefit to Developer

  • Nil – minimal cash investment in project.
  • Project de risked as sold to investor.
  • Finance provided by investor.
  • Profits taken in stages throughout process, rather than at the end as with traditional funding of speculative property development structures.

Pricing

Bespoke and negotiable. A balance needs to be struck between the return required by the investor and the profits desired by the developer.

Construction Type

New Build, Conversion

Location

England, Wales, Scotland

Planning Consent

Full Planning Consent must be in place or consent under Permitted Development Rights (PDR).

Borrowing Entities

The land is purchased by the investor.

Security

  • The land is purchased by the investor
  • Various legal agreements relevant to this model

Project Size

Large Build to Rent projects