ABC FinanceDevelopment financeDevelopment finance guidesThree methods of funding property developments without a deposit

Three Methods of Funding Property Developments Without a Deposit

Find out how you can fund property developments without any deposit

Author: Gary Hemming CeMAP CeFA CeFA CSP

20+ years experience in development finance

Joint venture property development is a popular form of funding. In this guide, we will run through the three methods of funding this type of development finance.

100% development finance

100% development finance (or JV finance) is the name used for development finance where no cash input is made by the developer. In return for fully funding the development, the funder will expect to share in the profits accrued by the scheme.

In general, the lender will still charge interest on the amount borrowed and will then look to take between 40-50% of the profit.

The advantage of going down this route is that the lender will usually have a strong track record, meaning they are easy to trust. In addition, there are only two parties involved in the application, making it very easy to manage.

Private investors

If the figures are strong, a private investor may be willing to fund your development for a share of the profit. An SPV (Special Purpose Vehicle) Ltd company is usually set up, each persons’ role defined – although many investors do nothing but provide the money – and the development begins.

This approach can be straightforward if a reliable private investor is interested in the deal and has the funds readily available. Difficulties can arise however as there is no impartial third party involved and differences of opinion can cause major issues.

In addition, approaching many private investors isn’t 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’s the first time you’ve 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 & a private investor

The third option for funding your joint venture property development is to team up with a private investor, and then arrange senior development finance jointly.

This approach has significant advantages over just using a private investor, especially if the investment is arranged by the same person as the finance. As the investor will already have connections with your broker, you can be more confident that they are truly looking for joint venture opportunities, and are unlikely to steal your deal.

Also, as the development finance reduces the amount needed from a private investor, it tends to be easier to find a willing partner. This also benefits the investor as they will receive a much bigger return on investment for their initial outlay.

How can you make your proposal more appealing to potential partners?

Investors expect a well thought out, detailed and well-presented proposal, or pack. If your proposal leaves a number of questions unanswered then you’re making it easy to turn down.

The flipside to this is a clear proposal that answers every question in the potential investors mind. A strong pack like this will promote confidence in you and your project. If the investor is ‘on the fence’, confidence in the presentation may be the factor that swings their decision in your favour.

When you put information together, you’re providing an insight into your organisation skills and how you’ll manage the project. You don’t tend to get multiple chances with a potential investor, so it’s important that you present yourself as well as possible on the first attempt.

What are the key drivers for investors who are looking to partner with developers?

Reducing risk is just as important as increasing the on-paper profit from a potential project. A project that is likely to produce a predictable return is very appealing, where that return is at a strong margin.

The way investors tend to look to keep risk down is by working with experienced partners, who can demonstrate their ability to manage the project. This can only really be done by detailing previous projects on a similar scale which have been successfully delivered. This area of risk is known as construction risk.

Another big question around any project, is the sales data for similar projects in the area. The key drivers here are the average price paid for similar properties, in addition to the average time taken for them to sell.

Where a number of similar properties will be built, and they take a long time to sell on average in that area, the risk of having to accept reduced offers increases. This can pose a major risk to the expected returns.

Strong, predictable demand for any units being built is crucial in reducing risk. This is known as sales risk.

Keep reading – The essential documentation for securing development finance

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