Equity Development Finance

Equity Development Finance – Expertise Driven Funding for Your Project

As is the case with financial markets, meeting success in a property development business relies heavily on right decisions being made at right times. From choosing the best contractor to timing the exit perfectly, the eventual profitability of such projects is a direct result of making the right calls. Perhaps the most important among these is the call to choose the most suitable Development Finance.

Barring a few resourceful exceptions, most property developers bank on external financing to carry their projects through. A standard Development Finance package often suffices for conventional property development projects. However, there arise exceptional times when such templated financing products don’t add much towards making the project successful. Ambitious, multi-layered property development projects that are expected to cost millions of pounds before any profits can be booked are examples of such exceptions. To help finance such projects, resources from multiple stakeholders are combined in a single, powerful financing tool. Termed aptly as Equity Development Finance or Joint Venture Development Finance, it can safeguard the interests of all stakeholders and apportion the profits.

What is Equity Development Finance (Joint Venture Development Finance)?

Equity Development Finance is an external financing tool. Aimed exclusively at financing expensive property development projects, it allows the maximum flexibility in terms of the loan term and risk sharing. A group of lenders and/or investors is formed to raise the required funds and share the equity in the project.

Unlike other Development Finance types , Joint Venture Development Finance (JV Finance) can potentially raise enough capital to cover the development costs in full.

How Does Equity Development Finance Work?

Equity Development Finance works in ways that are much different in comparison with other types of Development Finance. Despite the eventual goal being the same – that of achieving maximum profitability – Equity Development Finance separates itself by following a unique and somewhat complicated process.

For developers who are interested in learning more about how Joint Venture Development Finance works, we have produced a textual schematic of the process below.

• The developer spots an open opportunity in the market.
• The tentative planning is carried out to draw an estimate of development costs.
• Upon finalising the plans, necessary planning permission is obtained.
• An estimate of development costs, in accordance with planning permission, is prepared.
• Interested investors and lenders independently assess the plans and valuate the project.
• A preliminary discussion helps finalise the interest rate, loan term and profit sharing mechanism.
• A special purpose vehicle (SPV) is registered to safeguard the interests of all stakeholders.
• The said SPV acquires the property, allowing the developer to commence the project.
• Upon completion, the developer can sell or refinance the property to mark the end of the project. This is when profits are booked and shared as per the agreement.

Let’s consider an example to demonstrate how Joint Venture Development Finance can help developers.

Example

An experienced property developer with a proven track record has decided to develop a commercial property into 3 floors of habitable corporate space. The said property is up for sale at an asking price of £470,000. The development costs, as per the initial estimates, are expected to be around £1.1 million. The same estimates put the GDV of the property at around £2 million.

The developer can, however, invest no more than £200,000 into the project. This leaves a funding shortfall of £270,000 for acquisition and £1.1 million for development. Three independent lenders agree to bridge this shortfall. The developer’s stake in the project thus reduces to 12.7%. The profit sharing agreement allows the eventual profits to be split 55:45 in the developer’s favour.

The developer manages to successfully exit the project with net overall profits (shared) to the tune of £430,000.

Notable Features of Joint Venture Development Finance

• Flexible funding period (usually capped at 24 months)
• Hight LTC (60-85% in most cases)
• Relatively lower interest rates
• Promotes expertise sharing
• Ideal mode of financing for developers who have access to limited funding

While all these features are undeniably attractive for all developers, Equity Development Finance does have its limitations. Since the developer’s stake, and in turn their exposure to risks, is minimal in such projects, lenders employ stricter lending criteria. Thus, inexperienced developers find it difficult to secure Joint Venture Development Finance.