How to fund a Development Project if you don’t have a deposit
There will be times when you do not have the deposit required for your next development project. This can be a common occurrence when property developers are working on several projects at the same time, or are waiting to sell a completed development. Below are several methods where development projects can be financed even if you have no deposit.
100% Development Finance
(Often referred to as Joint venture finance)
With 100% development finance the lender provides all the funds needed for land acquisition and cost of build. Once the development has been completed and sold, the profits are shared between the developer and lender.
This kind of financing is generally is only available where planning permission has been granted and the developer is experienced. However, in exceptional circumstances, applications from first time/ inexperienced developers may be accepted.
The development project will need to have a high gross development value (GDV), usually in excess of £1m and a good return on investment. As a percentage, the lender will want to see a margin of at least 25% on the development project. Whether interest is payable will depend upon the lender’s criteria. Some lenders will accept the interest being rolled up into the loan and take a small percentage of the profits, whilst others will not charge interest but take a bigger share of the profits.
A lender who is willing to lend at 100%, will usually want some sort of personal guarantee (PG) from you over the debt. However, various lenders will take a different view on the PG with the majority accepting a capped PG.
The creditors who supply this facility are seeking to work with developers that have a good history of delivering profitable development projects. They may arrange a deal, so that interest charged will be paid once the development is sold along with their share of the profit.
If a development project looks attractive in terms of being very profitable then a private investor could be interested in coming on board with you. This would generally be via a special purpose vehicle (SPV) which is a form of limited company set up to manage the project. Some investors will invest in the project but leave the daily management to you, whilst others are going to wish to be more involved. Agreeing up front how matters will be handled is critical to preventing disagreements later on.
Locating a private investor can be challenging if you are a newcomer to the area of development. There is a risk that in the event that you share the specifics of your planned project with an investor, then they could choose to take the project on for themselves, and purchase the land / property, without your participation. Hence, looking into an investor’s track record is vital before you talk about the specifics of a project.
A Private Investor combined with Senior Development Finance
This choice entails working with a personal investor and jointly applying for development finance together, for the main portion of the investment needed.
Basically, the private investor is providing the deposit, which the developer does not have. This may be valuable to both parties. For the developer it makes it simpler to locate a private investor since they will not have to put as much funds under this option. For the private investor they will be possibly looking at a larger yield for a smaller investment.
Equity Release from your home or other properties you own
In case you have equity tied up in your home or other possessions, you can utilise this through a re-mortgage, guaranteed loan, or a short-term loan such as bridging finance, to give you the required deposit.
This is a comparatively fast and effortless path to take when you have got no other method of raising a deposit. However, of course, it will mean that your growth is going to be 100% debt financed. It will also indicate that you will be left with extra debt if your development project does not reap the rewards that is forecasted.
Provide additional security
Should you have extra assets in the shape of different properties, these may be utilized as additional security for your loan. This lessens the loan to value figure to your lender as the loan is going to be distributed across the value of the development, along with the further properties being provided as collateral.
Purchase under value then do a refurb
Some lenders might look at lending 100% of the cost of a home if you are in a position to buy it for less than its open market value. By way of instance, if you were to pay a price that was about 70% of the current market value, then a lender may be ready to finance this on the premise that there is added value in the house.
However, you need to tread carefully here. You might believe you have an excellent bargain, but you have to ask yourself, how is it that you are able to buy it under value? Sellers do not often want to throw away money, so will try and find the very best price for their home. If your offer on the property or land is the best price then it is most likely to be the actual current value.
Therefore, why would a surveyor value it higher? The surveyor’s role is to decide for the lender what the worth of the house/land is, and certainly that is the selling price.
Yet there are circumstances when property or land are bought under value. For instance:
- The purchaser might have agreed a deal with the seller – for instance a property developer may have approached the owner of some land that does not have planning permission and agrees to buy it from them at a fixed price. The purchaser is then responsible for obtaining planning permission on the land. Once planning permission is obtained, the value of the land will increase. The buyer can then organize finance based on the greater value, although buying the land at the lower cost than had formerly been agreed.
- A price may be agreed for a home, but prior to completing on the purchase the buyer carries out improvement work to the property. This work increases the value of the house, meaning more finance can be obtained, but the price of the property remains at the cost previously agreed.
- Purchasing from a relative/ family member who is selling at a discount or making a gift.
The Advantages of Joint Venture Development Finance
Using a JV development lender rather than using your personal funds permits you to grow quickly without needing to tie up your own capital. Although gains with joint venture development finance are shared, more development projects can be taken on, meaning that your potential profit can grow at a faster pace.
To save on legal fees, you can arrange a special purpose vehicle (SPV) with the lender, meaning there will be one set of legal fees payable between you and the lender. Where projects are located close by, cost savings can be created by sharing resources between the different project site’s.
Assessing your Joint Venture Development Finance project application
Joint venture development lenders are carrying all the financial risk in relation to this type of deal and will want a decent sized reward for doing so. Therefore, applications are subject to rigorous underwriting based on the following:
- Expertise: This can be an important factor, as most lenders will want to make certain you have a history of delivering the type of project you are wanting to build.
- Profit: Lenders will evaluate the potential profit in two ways:
- They will estimate whether the uplift in total price of at least 25% is realistic. The greater the margin, the more appealing the proposition will be.
- The prospective JV partners will normally only become involved in development projects with a GDV over £1m. Developments above £2m are the most attractive because of the increased potential gain.
- Exit Route: Another vital point is exiting the loan. The demand for type of units you are building must be strong. Your strategy has to have the ability to demonstrate saleability. The location of the project site tends to help with the saleability
100% development finance is provided on a profit sharing basis, using an agreed split on the sale of the completed development. The profit on a development project is usually split on 50/50 basis, however we may be able to secure 60% in your favour if we can produce a strong application.
How Finbud can help you
At Finbud, we have knowledge and experience of joint venture development finance deals and connections with the best lenders. By working together with us, you will be able to get access to the entire marketplace of development lenders through one easy, fast enquiry.
Finbud will make the entire process simple for you, which means that you can concentrate solely on the forthcoming project while we negotiate with numerous lenders on your behalf to secure the best deal. Also, we do not charge any broker fees for standard cases, which in turn saves you money.