What is 100% development finance?
100% development finance, also known as joint venture (JV) development finance is a method of developing property without using your own money. As the lender provides all of the money needed to complete the project, profits are usually shared on the sale of the site.
Generally speaking, the profits usually end up split on a 50/50 basis. Some lenders will charge interest on funds drawn down and split profit in your favour slightly. Others will charge no interest and simply split 50/50.
Where interest is charged on the debt, it is usually allowed to roll up, meaning there is no need to service the debt. JV development finance is designed to cover 100% of all purchase and build costs of the project. This means that site acquisition and build costs are both covered fully.
What is the criteria for joint venture funding?
100% development finance is only available to experienced property developers.
Full planning permission is required for an application to be considered by a joint-venture development finance lender. For any JV application, the lender will be unwilling to take any planning risk, so this is a key factor.
The lender will be keen to see a strong return on their investment. As such, they will not usually consider a joint venture for a site with a GDV below £1m. As a percentage, the lender would want to see a margin of at least 30% on the scheme. Unfortunately, we can’t consider smaller schemes, even where they are very profitable.
Any lender willing to offer 100% development finance will only lend when the debt is supported by a personal guarantee (PG). Different partners will take a different view on the level of PG, but most will accept a capped PG, often at 20% of the funding amount.
Can you offer 100% development finance without a profit share?
Yes, it is possible to take out development finance without putting down a deposit or profit sharing with a joint venture partner.
In order to do this, you would be expected to provide additional security in lieu of a deposit by way of a charge over another property, or properties. This could be your own home, investment properties or even land that is to be used for future developments.
100% funding without additional security will always result in profit share.
Do I qualify?
In order to qualify, you must the following criteria:-
- Be an experienced developer – this means you will have completed at least one development of similar scale to the one you’re proposing.
- Have a profitable scheme – in excess of 25%, but ideally with a margin of over 30%.
- Your project has full planning permission in place.
- The gross development value is at least £1,000,000.
How it works
When taking out JV development finance, the issue of ownership is usually one that confuses people. Usually, the property will be placed in a special purpose vehicle (SPV).
This is a Ltd. company set up purely to own the asset and hold the liability. The SPV will usually be owned by the funder, with a guarantee in your favour.
The benefits of joint venture development finance
Working with a JV development finance lender instead of using your own funds allows you to develop quickly without having to tie up your capital. By taking this route, although profits are shared, more projects can be taken on, meaning your potential profit can actually grow.
Where projects are located nearby, cost savings can be made by sharing resources between your sites.
How are joint venture development finance applications assessed?
Joint venture property development lenders are taking all of the financial risk on the application and will want to see a reward for doing so. As such, applications are subject to strict underwriting on the following basis:
- Experience: This is crucial, as lenders want to ensure you have a track record of delivering the sort of scheme you are looking to build out.
- Profit: Funders will assess the likely profit in two ways:
- Firstly, they will judge the uplift in total cost of at least 25% for the scheme to be viable. It goes without saying, but the higher the margin, the more attractive the proposal.
- Secondly, potential JV partners will generally only get involved in sites with a GDV over £1m. Sites above £2,000,000 tend to be the most attractive due to the increased potential profit.
- Exit: Another key point is exiting the loan. Demand must be strong for the finished units. Your scheme must be able to demonstrate saleability. Location of the site tends to go hand in hand with this point.
What information will I need to supply?
In order to assess a potential application, we need to see the following information:-
- A fully completed proposal form (get in touch and we can send you one).
- Your development CV.
- A detailed schedule of works.
- A detailed schedule of costs.
- Full copy of planning permissions (or a link to the planning portal showing permissions).
- Detail around the end value of the scheme.
How can I increase my chances of success?
Detail is crucial to the success of these applications. The key points of consideration are the perceived construction risk, the perceived sales risk and the profitability of the scheme.
As an applicant, your job is to satisfy any potential funder that these risks are as low as possible. This is done by providing top quality information that will give comfort and allow a funder to really understand you and the proposal.
You can’t change your level of experience or the location of the site, but you can help a partner to really understand why the deal is so appealing to you. It’s key that you help to paint this picture, as it’s imperative that you gain buy in with the information that you supply.
The two key methods of ensuring that the scheme comes across as well as possible are the hard data provided and the presentation of the documents. The better each of these are, the higher your chances of success.
Will I be expected to profit share?
100% development finance is offered on a profit share basis, with an agreed split on completion shared. Traditionally, profits are usually shared on a 50/50 basis.
I don’t have experience, could I proceed but take a lower share of the profit?
No, we can only offer joint venture funding to experienced developers.
For first time developers, it’s best to start small, looking for local investors who may be interested in refurbishment projects.
I have refurbished property before, but never built, would I qualify?
No, we can only work with applicants who have experience of similar projects previously.
For example, when building a 30 apartment scheme, having built a 5 apartment scheme in the past would not be sufficient.