While mainstream lenders have become more strict on criteria, joint venture funding has become a popular method within the development finance sector.
Read on to find out more!
100% Development Finance
100% development finance often referred to as JV funding is a method used for development finance where no deposit is needed. In exchange for fully financing the development, the lender will often need to share the profits made from the development project
Normally, the lender will still charge interest on the sum borrowed and will look to take between 40-50% of the profit made.
The benefit of going down this path is that the lender will normally have a solid track record which means they are more easy to trust. Additionally, there are only two parties involved in the application process, which makes it rather simple to manage and control.
If the forecast for projected returns are strong, occasionally a personal investor will be willing to finance your development project to get a share of the profit. An SPV (Special Purpose Vehicle) Ltd. is usually created with each individual role defined. However most investors do nothing but the capital investment — and then the development starts.
This strategy can be simple if a trusted private investor is considering the deal and has the required funds readily available. Problems can arise when there is no impartial third party involved and differences of view arise which can lead to significant troubles later down the line.
In addition, approaching many private investors is not always wise. As each investor would want full details of the scheme, there is a danger that they could decide to buy it without you. This risk is bigger if it is the first time you have worked with them. Although not all investors would do something like this, it is often too late by the time you find out.
Senior debt combined with a private investor
A third option for funding your development is to team up with a private investor and at the same time arrange senior development finance.
This approach has important benefits over simply using a private investor, particularly when the investment is organized by precisely the exact same person as the finance. Since the investor may have links with your broker, you will be confident that they are truly searching for joint venture opportunities, and therefore are not likely to steal your own deal.
Also, as you require less development finance from the private investor, it will become a lot easier to find a willing partner. This also benefits the investor since they are going to be given a much larger return on investment for their initial outlay.