- 7th April 2020
- Posted by: DMM
For a property developer who has found the perfect site but has their cash tied up in other land, a Joint Venture (JV) partner can be a solution to finding 100% funding. A JV can be structured in several ways but typically this will be a partnership between a developer and equity investor. Such JV arrangements can be for facilities from £500,000 to £10 million plus.
A JV partner providing equity may do so behind a senior lender with their return being a share of the net profit. Otherwise the partnership may be simply between the two parties with the equity partner funding the whole deal in return for an agreed share of profits.
If a developer does not have the funding for a project that they believe is a great opportunity, then there are lenders that will provide funding for 100% of the development costs. However, such lending is naturally high risk for the lender and so stringent criteria and high rates of interest should be expected. A low loan to value or additional security and personal guarantee’s will often be an essential element for such lenders too.
“the partnership may be simply between the two parties with the equity partner funding the whole deal in return for an agreed share of profits”
JV Partner for Development Finance
With a JV partner there is an arrangement between the parties where their separate roles enable a successful development. The developer will bring the project concept and the management skills to make it a reality. The investor party will provide the cash to enable the acquisition, construction and exit.
The criteria for a JV partner will vary, but as an example, they may want:
- An experienced developer with a strong track record
- Planning permission in place
- A project length within their criteria, perhaps a maximum of 24 months
- The development type to be within their expertise, perhaps residential only
- Strong likely demand for the proposed property types
- GDV and individual unit prices within their own criteria
- The developer’s interest to be held within a clean SPV
- An agreed interest rate for the loan amount and fees
- The profit to be shared on an agreed basis, perhaps 60/40 (in favour of the developer) or 50:50
- Some may want PG’s but not always
Whilst giving away up to 50% of a project profit may seem steep, one has to remember that the JV partner providing the loan is enabling a project to happen that may otherwise not happen. Other advantages for a JV partner include:
- One lending partner to work with
- A single set of legal administration and procedures
- The lending partner covers the set-up costs
- One monitoring QS
- No need to service the debt with interest rolled up
- Often no PG/s