100% Development Finance
100% development finance (or JV finance) is the name used for development finance where no deposit is required. In return for fully funding the development, the lender will usually want 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.
In the figures are strong, sometimes a private investor will 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.