Equity Investor Property Development Finance
Over the last few years a new bread of investor has started to emerge. They are Thoroughbreds in equity investor property development with vast amount of experience. This new type of equity investors are high networth individuals who are using their own money to directly invest in property development projects.
This type of investing is non regulated and falls outside of the FSA regulations. Thus allowing for more flexibility and creativity when it comes to helping your fund your next property project.
Wow times are changing, and my question to you is! Will banks soon be a thing of the past?
I remember in 2016 before I took up my new role as a virtual mentor. I was working with a client that was looking for development finance. The finance was for a refurbishment project, after endless meetings with leading banks, a shit load of due diligence and not to forget the numerous rejections. I was eventually able to secure the debt finance.
I must admit it was the first case in which I actually doubted if I was going to be able to secure any funding.
The development project was a great investment opportunity however my client lacked experience and had only 20% of personal investment.
So, if you are familiar with bank lending you will know what I mean when I tell you the risk ratios where to high. However, after 6 months yes you did read that right. It took me six months to eventually secure the funds. This was only after securing a further 100k investment from family. They had to agreed to numerous security requests not to mention the costs!
So, it will be no surprise that when I found this new form of property development finance I was quick to investigate further.
I want to start by discuss who these people are and why they are different than your normal bank lender.
Who are these new investors?
First of all they are not brokers, they do not need to find investors or meet with high street lenders to get funding for your venture.
They are private individuals who have come together to form a company from which they invest funds directly into projects just like yours.
These investors all share a common thread they have vast amounts of experience in the property development industry. Already to date they have used their money to help property developers just like you. They have helped them grow their business while helping them make profits.
They all share vast amounts of expertise when it comes to property development. Which in turn means they understand the needs and issues shared by most property developers.
As a property developer working with these investors, you will have the opportunity to pull on their knowledge and experience. Especially when it comes to buying, developing, refurbishing, selling and refinancing your large property projects.
What type of projects do they like to invest in!
- New builds
- Residential Properties
- Commercial Development
Equity Investor property development finance can be used for property development for either major new building projects or comprehensive renovations. Think new housing estates, luxury homes, office blocks converted to flats, etc. It can also include residential, commercial and mixed-use property.
How does it work?
A joint venture or sometimes referred to as JV is a business arrangement in which two parties come together and pool their resources. They have one main purpose and that is to acquire, refurbish and complete property development projects.
It all starts with the initial appraisal of the project.
On completion of the appraisal a value is placed by the investors on the project. The value is then used to determine the value of an investors equity stake in the project.
If you agree with the suggested profit share, the investors will then instigate the property purchase. As we have already discussed in my last article on equity property crowdfunding a SPV company will be formed.
It is normal at this stage for the investors to take full control of all the shares in the company. However, do not worry as a separate contractual agreement will be put in place which will ensure all your rights are protected.
As the property developer you now have the responsibility to develop and complete the property project. Its in your interest to make sure the project is completed on time and to the required standard.
Once the project is completed you will have the option to sell the units or refinance under a traditional commercial mortgage.
Once all the units are sold or refinanced you will repay the investors in full as per the terms agreed. The shares in the SPV will then be transferred in full to you as the JVP.
What are the benefits of working with equity investors?
- As a property developer it will allow you to quickly grow your business.
- You will be able to increase your workload capacity.
- You will be able to share the risks associated with any property development project.
- You will benefit from being able to access a team of experts. All with contacts and experiences that will help you grow a successful business property development business.
The nitty gritty
Let’s just spend some time looking at a deal which has just been completed.
Equity Investor Property Development Joint Venture Deal
Background An existing borrower (JVP) to EQUITY INVESTORS agreed to purchase a closed down business centre for £650,000.
They had obtained consent through Permitted Development Rights to convert to 22 studio and 1 bed apartments.
JVP had experience with residential conversion albeit on a smaller scale but had a good design & professional team in place.
At the point that the deal was submitted to EQUITY INVESTORS notice had been served on JVP to complete the purchase within 10 days.
- Purchase Price – £650,000
- Purchase Costs – £28,000
- Refurbishment – £750,000
- Sales & Marketing – £40,000
- Interest @ 8% pa – £100,000
- Total Exc. Interest – £1,568,000
Equity Investors Property Development Deal
JVP had circa £200,000 to put into the transaction so needed a facility of £1.35 million.
This represented 88% of the total expected costs. Aitchison Rafferty provided a Valuation Report that supported the purchase price and costs and a gross development value of £2.2 million indicating a profit after interest of £632,000.
The report excluded the value of the Freehold interest which at the time was estimated at £150,000 giving a total expected profit of £782,000 EQUITY INVESTORS agreed a deal and facility to provide the full facility required in return for interest of 8% per annum and a Priority Profit Share of £285,000 over 18 months (£10,000 per month decrease offered for repayment before 18 months).
This represented 36% of the appraisal profit and an Internal Rate of Return (IRR) to EQUITY INVESTORS of 30%.
The equity investor property development deal was put in place within 10 days.
The property was purchased in an SPV company with 100% of the shares owned by EQUITY INVESTORS.
JVP and EQUITY INVESTORS simultaneously entered into a Development Agreement and Facility to outline responsibilities and protect JVP’s interests.
JVP has the right to acquire the shares in the SPV for £1 on repayment of the debt, interest and profit share.
Management JVP is responsible for the refurbishment project and sales.
Aitchison Rafferty are appointed Monitoring Surveyor on behalf of SPV to provide independent assessment on the cost, quality of the works and the build programme.
During the works JVP has amended some of the units adding floor space, accommodation and therefore value.
The units are now all 1 and 2 bed with no studios. There have been issues with the design of the roof that caused a 4 months delay.
The project costs have increased by circa £400,000 and the facility needed has risen to £1.45 million and 24 months but the GDV has also increased by £700,000 according to Aitchison Rafferty.
JVP has taken 10 formal reservations and has a contract in place to sell the freehold for £250,000, £100,000 more than budget.
EQUITY INVESTORS have worked with JVP closely throughout the venture and have formally agreed to extend the facility as needed and increased the JV period to 27 months in return for a further £17,500 per month after month 18. Link to property development can be seen by clicking this link.
What information do i need to provide?
If you are interested in equity investor property development funding. You can find the expression of interest form on my website. This includes the details that will be required. Plus any associated fees.
How long will it take?
If you complete the expression of interest form before 3pm you should have a reply within 2-3 hours. If you complete the form after 3pm you will receive your information before 12 noon the following day.
Sharing the risk
If you do decide to grow your business with equity investor property development funding. You will need to be prepared to share in some of the risk. If you have something to lose in the deal, it gives the project a higher chance of success.
With my equity investor partners they will expect you to contribute a minimum of 10% into the project cost .
If this is a challenge and you have other investment properties. You may want to consider a secured line of credit. Our partner Just Cash Flow specialise in helping property developers with deposits.
Please bare in mind that you will not be able to use the property development project as security as the equity investors will want to take the first charge.
Lets just have a quick recap on equity investors JVs
- Shared risk and reward strategy
- You will need to put in 10% of your own funds into the deal
- 90% equity funded
- Projects in England and wales
- Equity investments from £250k – £2.5m
- Flat fee of 8% per annum plus 25 – 50% profit share
Profits share, and fees are reduced on a monthly basis when the project is completed quicker than predicted.
Equity investor property development funders will need a 20% profit share for the project to be considered as viable
The property developer will benefit on completion of the project from a return of his original investment and at least 50% of the GDV profit share.
Free Guide Equity Investor Property Development Funding
If you are interest in equity investor property development funding for your next property development project. Don’t forget to download this free guide.
How To Tap Into My Services For Free
As part of my service to clients I offer a pre screening of your application, based on the eligibility criteria. Followed by submission and negotiation service with the chosen provider.
Furthermore, should your business be selected as a client I will provide the mentioned service free of charge.