While traditional debt financing will always have the lion’s share of the development market, two ways to fund a project that should nevertheless be on a broker's radar are joint ventures (JVs) and equity funding.
With smaller, often regional, developers gaining confidence and experience in the current fast-moving development market, we are seeing a little more interest in both these routes.
After all, a typical JV scenario emerges when a developer has cut its teeth on a number of smaller projects, but wants to take on something more adventurous. The problem is, that developer could be found wanting in two main areas.
Sometimes, it will not have the capital to get to the necessary loan to cost for a lender; other times, while having the necessary funds, it may not have the experience to give lenders the reassurance they need.
So what next? Well, one option for a developer wanting to move to the next level but which lacks the necessary capital or is seen as a little green is to consider entering into a JV with a more experienced developer — and split the profits according to the deal put together.
- Joint venture to develop £35m South Yorkshire industrial scheme
- New JV starts 630-bed student accommodation scheme in Lancaster
- Developers waste £20m a year on interest, claims packager
The JV route can help smaller developers gain the experience (and ultimately capital) they need to go it alone, and a decent packager will have the contacts and experience to make it happen.
The equity funding route, by contrast, tends to be suited to more experienced developers that cannot quite achieve the loan to cost to get a development financed through debt alone but who have the skillset and track record to make a potential investor comfortable.
However, it’s important to bear in mind that most investors will only really look at a development if there is scope for them to make at least 25% of the gross development value by way of return. So this will rule out many developments immediately.
Generally speaking, a typical investor could be a family office, high-net-worth (overseas or UK based) and sometimes even a successful developer who may provide not just the required funds, but some expertise and experience, too.
Brokers should note that there is no fixed proc fee with either the JV or equity funding route. Instead, their fee – which could be up to 1% – will be built into the loan stack.
But with more and more office-to-residential developments taking place beyond London and the South East, and SME developers often driving them, brokers should always have the JV and equity funding routes at the back of their minds.
They can be the difference between a development happening — or not.
And getting paid — or not.