High goals but not enough funding to go ahead? Raising finance for property development can sometimes be challenging, but it is not impossible. There are quite a few options to obtain property development finance, even with low equity. A professional finance company will clarify all doubts but given below are some suggestions.
1. Crowdfunding
It is an online portal that brings many investors together and manages the process for them – whether it is a single house, a selection of apartments, a warehouse or an entire block.
Pros:
- It can be done with much less finance output.
- Ownership in a share in the property in proportion to the amount invested.
- The platform finds an SPV (Special Purpose Vehicle) in whose name the property will be bought.
- It is usually a short-term investment when the profit at the time of completion and sale is shared among the investors.
- Crowdfunding can be trustworthy, as legitimate companies will adhere to the strict rules drawn up by the FCA.
- It is a flexible investment, with small amounts. It saves on deposits for a mortgage and costs involved with financing, stamp duty and project management fees.
- It allows investment in single property development or with various properties.
Cons:
- Fees and payments to the platform and advisor.
- A personal guarantee may need to be provided.
2. The Government has a scheme whereby investors are offered attractive tax relief, making it feasible for them to invest.
SEIS – Seed Enterprise Investment Scheme: The first money invested in starting a company is seed capital. This scheme is for start-ups and early-stage development companies. The maximum receivable is £150,000, and the company should not have more than £200,000 in assets at the time of issue. It should also be relatively new and not have been in the trade for more than two years.
EIS – Enterprise Investment Scheme: This can be used for more mature and slightly larger companies though still at an early stage.
3. Mezzanine Finance:
Mezzanine Finance is the bridge between equity and debt financing. It is used for raising funds for specific projects and can provide higher returns.
Pros:
- A quick way to obtain capital.
- The developer controls as the property are held in an SPV (Special Purpose Vehicle) owned by the developer.
- The increase in IRR (internal rate of return) on the investment can be significant.
- Stress-free funding, as a large portion of the profit, stress-free funding will go to the developer with the balance towards finance cost in the future.
- It is flexible and can have fixed or variable interest payments.
- Restructuring mezzanine financing into senior debt at a lower rate can save on long term interest costs.
- Sometimes it is tax-deductible.
Cons:
- It is usually an unsecured debt and more expensive.
- Giving up equity as interest in case of default in payment.
- Some lenders may require warrants for a share in any profits of the borrower.
- The terms are usually concrete, and borrowers should study the same carefully.
4. Joint Venture Funding
A JV partnership can provide 100% funding towards land and development costs. The developer will be in charge of operations. On completion and sale of the project, the profits are shared. The property will be held in an SPV jointly owned and controlled by the investor and the developer. A Shareholders’ agreement will specify the details between the developer and the investor.
Pros:
- Bank debt may not be necessary.
- Legal and other documentation will be taken care of.
- It is usually flexible with rates.
- Sharing of costs (and risks) with a partner.
Cons:
- When understanding between partners is not specifically clarified.
- Level of investment and expertise unequally matched.
- Work and resources not distributed equally.
5. Loan Note funding
This is a financial document from the developer (the issuer) to the investor (the noteholder). The developer agrees to pay the loan with fixed interest (called the coupon). It is usually a short term investment.
Pros
- Loan Notes are flexible including repayment terms, interest payments, transfer provisions, terms in the event of default etc.
- They can be secured (against the property or other assets of the developer) or unsecured, which risk is partially covered by the coupon.
- The developer can issue Loan Notes to multiple investors, and they need not be issued simultaneously.
- Loan Notes can be given without any equity or on the basis that equity will be presented at a future date or under specified circumstances.
- They do not require consent or action by a single lender. The outcome will be possible only when a specified majority of investors agree, giving the developer more time to negotiate.
- They can be transferred or assigned, amended and cancelled.
Cons:
- Careful management is required.
- The Information Manual (IM) issued by the developer should be transparent and contain relevant information about the Loan Notes being issued with details of the developer, terms, security and risk factors. This IM is given to each investor prior to any investment being made.
Although options are available to raise capital for property development without much equity, careful consideration of all aspects needs to be taken. These will include how much capital is required, all the expenses incurred, the probable date of repayment, various fees, etc. It will need a professional finance company’s expertise to offer guidance and advice to obtain the best deal possible.