Home Property Finance & InvestmentMortgages How property developers raise development finance?

How property developers raise development finance?

by LLP Reporter
12th Jun 19 9:13 am

As a property developer, you may already know that property development finance is one of the most important aspects for property developers.

The finances can influence the cash availability for the support of the initial investment, the cash flow during the construction phase, as well as the profitability of the entire project.

Obviously, the hardest part of developing a property is getting your hands on the finances to get it all started! Therefore, in today’s article, we want to introduce you to the ways through which you can raise property development finance!

Things to consider

First, it is worth mentioning that every property case comes with a different type of development finance. Choosing the right type will help you generate correct levels of finance – in short, the levels that are necessary to successfully launch such a project.

Naturally, for someone that is raising development finance for the first time, the process will be rather difficult, compared to those that have developed property before. The latter can just rely on the cash made from previous developments.

Raising property development finance

So – what options do you have when considering property development?

  • Personal savings

Depending on the type of property you want to develop, you may never have enough personal savings to fund it. However, if you find yourself in a fortunate position and you are able to fund your development project, then you should definitely rely on your own cash as a first option.

  • Re-mortgaging

Re-mortgaging should be considered only after you’ve done extensive research, detailed project appraisals, as well as property valuations. Given that stability is key, you want to make sure that this kind of decision won’t endanger your funds and financial life.

Basically, this option implies re-mortgaging an existing property. It is quite common, but it is usually used by those investors that have a significant amount of equity or other property behind their back.

  • Further advance

If you can’t or don’t want to rely on re-mortgaging, then the second most common option is further advance.

As its name implies, this process requires you to ask an advance from your lender. However, keep in mind that this option of raising development finance may be the most expensive way through which you can generate money.

This is because further advance is usually offered on a standard variable mortgage rate. So, this may not be the most cost-effective form of finance that you have available.

  • Finance through mortgage

Even though you can freely choose a mortgage for a certain property development project, it is important that you select the right one. For example, the traditional mortgage is not recommended as it would be offered to an owner-occupier.

Specifically, the owner-occupier will not be able to sell the property since these mortgages come with a 25-year term. Therefore, it’s not the best choice if you plan on selling your property soon after you finish it.

In this respect, we recommend that you choose a mortgage that comes with no early redemption penalties – such as a tracker or a flexible mortgage facility.

  • Mezzanine loan

When it comes to a Mezzanine Loan, the property usually, will be held in an SPV – special purpose vehicle. This is controlled and owned by the developer. Naturally, the developer has to contribute equity, be it in the form of shares, loans, or combined, into the SPV.

For this type of financing, the investor will provide funding through a loan that is secured by a second charge, ranking behind the first charge lender. The SPV can be provided with development services by the investor, that will also receive fees.

  • Joint venture

Again, the property will be held in an SPV, this time jointly owned and controlled by the investor and the developer. The relationship between the two parties is decided by a shareholder’s agreement, as well as by the special purpose vehicle’s articles of association.

Usually, the investor and the developer hold different classes of shares – this is so that their economic and control rights are reflected properly, namely different.

In the case of a Joint Venture, the developer’s key individuals can directly hold shares in the SPV. This way, they will benefit from entrepreneur’s relief when the project will be sold and the SPV wound up.

  • Loan note issue

This time, the SPV is owned and controlled by the property developer. The SPV will receive money from several investors – they’ll lend money to it by subscribing for SPV-issued loan notes.

These notes will be secured by a second charge, ranking behind the first charge lender. Moreover, an independent party may be present as well. Called the security trustee, this party will hold the charge for the investors’ benefit.

  • Private, self-managed syndicate

In this case, the SPV will be controlled and owned by a small group of investors alongside the developer. The relationship between the two parties will be determined by either a shareholders’ agreement or by a syndicate agreement.

This way of raising development finance is known to maximise access to capital from several of existing contracts.

  • Crowdfunding – peer to peer lending

The developer owns the SPV, which is backed by a crowdfunding platform. Within the existing platform, many investors will be connected with the SPV.

A corporate finance adviser will be also present, in order to help the SPV/developer prepare for the offering.

The investors will make loans towards the SPV via a crowdfunding platform. All the loans will be on identical terms – again, secured by a second charge that’s ranking behind the main lender.

The bottom line

In the end, no matter how you choose to raise development finance, it is important to remember that such decisions should not be taken lightly and above of all, it must be structured and tailored to your needs.

Before even considering starting your adventure, we strongly advise you to undergo detailed research as well as investment analysis regarding all the aspects of your property development project.

You may have the finance needed in a short time, but planning, careful research, and due diligence are required if you want to avoid financial collapse or financial pressures.

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