Property developers typically need finance in addition to what the banks are prepared to lend; Property Investors need returns commensurate with risk; and Land owners might need help making their development projects a reality. If this is you, then please read on to see how we can assist you.
Our services are tailored to assist small-medium property developers and investors alike.
Lending to small-medium property developers
Unless you are prepared to fully fund the shortfall between what the bank will lend and the cost of the project, then small-medium developers will need to be resourceful to secure the 'gap' in funding. Senior debt (bank loan) is typically in the range 55-65% of the total cost of the project (including the cost of the land).
This 'gap' can partly be filled using what is known as mezzanine funding. This funding sits behind the senior lender (the bank) in terms of its security. Mezzanine lending takes a second charge over the development (after the bank) as its security. Mezzanine lending, depending on the target GDV, can maybe cover another 15-25% of the total cost of the project.
Mezzanine funding is more expensive than lending from the bank but it is much cheaper than equity funding. There is no share of the profits and the loan is typically fixed rate, fixed term. The senior lender (the bank) often has to 'approve' or at least be informed that there is also a mezzanine lender in the funding mix.
Spice Developments can arrange mezzanine lending for suitable borrowers. We especially like family run businesses and we have lending criteria covering:
- the developer track record and credit
- the quantum of funds required
- the amount of at-risk money provided by the developer
- the length of the project and the term of the loan
- the risk profile of the development project
Note, that our business model does not mean that we lend funds and walk away. We look for more of a 'business partner' arrangement since we are looking to build long term relationships and we always look to lend mezzanine funds alongside equity (see over).
Equity finance for small-medium property developers
Equity finance can have many forms. For example, a developer may be looking for a business partner to share in the pre-planning or holding costs. Or a developer may seek equity finance only after planning permission has been received. Generally speaking therefore, equity participation needs to be individually negotiated. There is no one-size fits all model and each investment is bespoke. Typically around 10% of the total cost of the project would be required as equity. Lenders will always look for the developer to have some 'at-risk' money in the project.
On some of the recent development projects in which we have been involved, early stage investment (pre-planning) can see equity returns of 100% or higher. Equity investors get the highest returns since they are often the first investors to provide finance and the last to get the returns out of a project. The duration is typically measured in years. Spice Developments can arrange equity finance and typically does so alongside a mezzanine loan, although not mandatory. We pay a lot of attention to the borrower and our business model requires more of a 'business partner' arrangement. The financing criteria are similar to the mezzanine lending (opposite) but since there is no security at all with equity finance, we would be placing a lot of importance on our due diligence of the developer.
As mentioned above, we prefer to lend mezzanine finance and top up with equity finance for suitable projects. From the developers perspective this is an optimal arrangement since there is only one business partner and financial interests are 100% aligned.
Lending and equity investment opportunities for investors
The counter to the paragraphs above, where the developer is looking for lending and/or equity finance, is the investor who is able to supply this financing. Since we are evaluating lending and equity opportunities as part of our business, Spice Developments can identify and arrange for investors to participate in the mezzanine lending and/or the equity we arrange with clients.
After funds are drawn down by the developer, Spice Developments manages the investment on behalf of the investor, dealing on a regular basis, directly with the developer. This 'partnering' continues through to the full repayment of principal, interest and/or equity.
Equity investors should be prepared for the scenario of higher risk and potentially higher returns. Equity participation could come at multiple stages of a development project together with different rates of prospective return. For example, investment before planning permission is obtained is obviously much higher risk than investing after planning permission has been obtained.
As described above, each equity participation needs to be individually negotiated with the developer.
There is no one-size fits all model and each investment is bespoke. On some of the recent development projects in which we have been involved, early stage equity investment could see returns of up to 100% or higher.
Assistance with development projects
Property/ land owners may sometimes wonder whether their asset has redevelopment potential. This is not necessarily a straight forward question. What might seem obvious from a casual inspection may have a completely different outcome after going through a design and planning approval process!
Leveraging on our business partner network Spice Developments can assist across the full value chain of a property development project:
- Determine the strategy (e.g. design, build, sell; or sell after planning gain)
- Feasibility appraisal (will the development make a profit?)
- Engage professionals (architects, consultants etc.)
- Prepare submission for planning application
- Arrange for consultancy support
- Assist with finance applications (senior, mezzanine and equity)
- Negotiate and arrange contractors
- Project management (of construction)
- Organise marketing and sales
- Finalise site works and legals
- Repay investors and/or lenders