“As little as possible” best describes property developers' current appetite to contribute deposits. If bringing some of your own was less of an issue last year, putting 30-40% on the table against a typical 60% LTGDV or 70% LTC for prime developments proves too much of a stretch for many now.
To close the lending gap and raise up to 100% funds for your property project here is a refresher of three options available.
MEZZANINE FINANCE
A mezzanine loan is a 2nd charge top up facility sitting behind the primary loan ( the ‘Senior Debt’ ). Typical Structure = 60% Senior Debt : 30 % Mezzanine Debt : 10% Client Personal Funds.
Pros
Developer will normally be required to input from only 10% of the projects costs in cash / equity stake.
Generally the Senior debt and Mezzanine providers will use the same Legal team, monitoring surveyors etc.
Cons
Senior Debt provider must be amenable to a 2nd charge being registered and any inter – creditor agreements, Limited Deed of Priority etc.
Potential high risk to mezzanine lender therefore mezzanine interest rates are much higher with 10 – 20% charged.
Some mezzanine funders may moderate interest rates but apply a higher exit fee to compensate.
STRETCHED SENIOR DEBT
When comparing a dual lender mezzanine structure versus a stretched senior debt structure both options include pros and cons.
Pros
A ‘ stretched’ senior loan offers a higher LTC / LTGDV advance.
The one lender can offer this debt, as no 3rd party mezzanine lender needs to get involved
Lender may advance up to 90% of the confirmed project cost generally with a limit of 75% LTGDV.
Cons
For the full term of the loan lenders offer a higher ‘blended’ interest rate
JV FUNDING
In JV arrangements, the developer and a JV partner (site owner or development lender) team up. To complete the project the partners set up Single Purpose Vehicle (SPV).
Pros
While the developer adds project experience, the vendor adds the asset to the venture.
Often the site can be brought to the deal, either unencumbered or very lowly geared.
Cons
JV partner may want to see a share of profit of typically 40% or more.
Underwriters may agree to a deferred consideration payment to the vendor on completion of the project – they will not dilute their 1st charge or Deed of Priority.
In developer/vendor JV arrangements lenders will always want to see some form of developer input in to a project - ‘pain money ’.
To discuss your options as a property developer and property investor get in touch with me: bcacao@cc-finance.co.uk; 0774 776 7312
"If you need to raise funds for your business or property have you spoken with your bank yet?" This is the first question I ask business owners, property developers and landlords. High street banks…
