How to get 100% funding for property developers
The arrival of the Covid vaccine and its potential success has opened opportunities for many establishments, including the property market. Developers are looking at ways to maximise this opportunity, especially with the current stamp duty holiday deadline. Securing funding is sometimes an issue, but there are ways to get around this problem. Just contact the experts in property development finance, and they will guide you with means of raising finance for property development, suitable for individual requirements and to Grow Property.
JV development: Joint venture development is a method of obtaining 100% funding without using your own money. The lender provides all the finance required, and the profits are split at the time of sale.
- There are different types of joint ventures – a combination of partners/family members/financial companies sharing resources to maximise output and profit and minimise financial risk.
- With a financial company, they will provide the investment and allow the developer to run the project.
- Joint ventures can offer increased capacity, decreased costs and risks as they will be shared and access to more resources like technology and specialised staff.
- Joint ventures can be flexible. A limited life span can cover part of the development work, thus minimising the commitment on both sides. If a further investment from a new party is required, the flexibility in the agreement should provide for this.
- The objectives are sometimes not completely clear, and the partners may differ in their goals.
- The disparity in investment, assets or expertise by the partners.
- Insufficient support and cooperation in the initial stages.
GDV: The approval for funding of development depends on the GDV – Gross Development Value. If the GDV is high enough, then the approval can be sought for a less percentage, but the amount will cover 100% funding for the development.
Home Building Fund: The Government in a drive to increase the building of homes offers the following:
- Finance on a short term and long term basis, usually 5 years for development and up to 20 years for infrastructure.
- Interest at pre-agreed rates is transparent.
- Income from sales can be adjusted against the loan.
- Subordinated lending can be considered.
Equity financing: This involves collecting funds from investors who will own a portion of the business – or property development – by transfer of shares.
- 100% funding can be obtained from a sole source on a first legal charge – giving the lender rights over the borrower’s assets, in case there is a problem with loan repayment.
- From two sources (value of shares between Senior Debt (the money borrowed to be repaid first if the borrower goes out of business) and Stretched Senior Debt (first charge facility to provide an even higher percentage of LTV (Loan to Value) or LTC (Loan to Cost) ratios).
- From three sources (value of shares between Senior Debt and Mezzanine Debt – which bridges the gap between debt and equity financing)
- 90% of funding can be obtained, where the provider will have Senior Debt at 80% of the LTC ratio. He will provide 90% of the shortfall of 20% with the borrower putting in the 2% development costs.
Choice: 100% funding sounds excellent, but there are many different aspects to consider first.
- Liability: It is best to look at options where the liability factor is minimised.
- Tax: Tax implications for various types of structures need to be considered.
- Project management: For JV development, it is important to be aware of who will be managing the project and how much say the investors will have in it.
- Fees: There are many types of fees involved – interest, lending fee in, lending fee out, profit share, valuation, legal including SPV, professional – all these will have to be looked into carefully.
The expertise of a finance professional related to property development is essential, and they are the right people to contact for all you need to know.