FREE REPORT: Top 5 Ways UK Property Developers can raise Development Finance from Private Investors

Introduction

“Access to development capital is the lifeblood
of any property developer.
For some, it’s the biggest constraint
on the growth of their business.”

 

The challenge of attracting development finance
Although debt is available from banks and alternative lenders, we find that many developers are not aware of the options available to bridge the gap.

In some cases, developers already have relationships with investors, and they just need help to approach them in the right way and formalise the arrangements. Other clients need guidance on how to raise awareness of their projects and attract new investors, without getting in trouble with regulators such as the UK’s Financial Conduct Authority.

Learn from the Top 5 structures used by developers
This report sets out 5 of the most popular structures used by developers to raise capital from private investors. It is distilled from our lawyers’ experience of working on investment structures for over 20 years.

The 5 structures you will learn about in this report are as follows:

  1. Mezzanine loan
  2. Joint venture
  3. Loan note issue
  4. Private, self-managed syndicate
  5. Crowdfunding (peer to peer lending)

Other variants and options are available, and in practice each structure will need to be tailored to the needs of the developer and investors involved.

To download your free printable PDF version of this report click here.

About LCN Legal
LCN Legal is a UK law firm which specialises in corporate and investment structures. Our specialist lawyers often write training materials for lawyers in other firms, and we contribute to respected publications such as LexisNexis and Practical Law.

We work alongside tax advisers to design and implement structures, and we guide our clients through the process of attracting investors.

General points to consider

  • Equity – how much equity you are willing and able to contribute to each project
  • Personal guarantees – to what extent you are willing to give personal guarantees to investors / lenders
  • Senior debt – whether you are willing to source senior debt from banks / financial institutions
  • Control – to what extent you are willing to give up or share control over decision-making on each project
  • Working capital – whether you also need additional working capital for your operations (as opposed to development capital for projects)
  • Track record – what kind of track record you are able to present to prospective investors
  • Pipeline – to what extent you are able to demonstrate a pipeline of projects
  • Transparency – to what extent you are willing and able to be transparent about your business and your processes for managing developments
  • Your contacts – to what extent you already have contacts and connections with prospective investors
  • Media assets – what media assets you have to support your messages to investors (e.g. a blog, individuals’ status as acknowledged experts)
  • Location of prospective investors – whether prospective investors are likely to be located overseas (in which case tax considerations such as withholding tax on interest may need to be considered)
  • Entrepreneurs’ relief – whether you and your investors are likely to want to benefit from entrepreneurs’ relief and potentially IHT relief
  • Land sourcing – whether the land for each project will be contributed from a land bank at developer level (in which case degrouping charges may apply)
  • Skills – whether you have the skills and appetite to administer / manage arrangements with multiple investors

The top 5 structures used by property developers to attract funds from private investors

Development Finance Slide1

How it works:

  • The property is held in a special purpose vehicle (SPV) which is owned and controlled by the developer.
  • The developer contributes equity into the SPV. This can be a combination of shares and loans.
  • Senior debt may be provided by a commercial lender. This is secured by a first charge over the property.
  • The investor provides funding by way of mezzanine loan, secured by a second charge which ranks behind the bank.
  • The developer provides development services to the SPV, and receives fees.

Advantages:

  • Simple to set up
  • Developer retains control over development
  • Relatively easy to obtain bank debt (but banks may want mezzanine debt to come into a separate SPV)
  • Investor may receive profit as part of loan interest

Disadvantages:

  • Developer generally needs to contribute equity
  • May not be tax efficient for investor

 

Development Finance Slide2

How it works:

  • The property is held in a special purpose vehicle (SPV) which is jointly owned and controlled by the developer and the investor.
  • The relationship between the developer and the investor is governed by a shareholders agreement and by the SPV’s articles of association.
  • The developer and the investor often hold different classes of shares in the SPV to reflect their different economic and control rights.
  • The key individuals of the developer may hold shares in the SPV directly, so that they can benefit from entrepreneurs’ relief on the sale of the project and the winding up of the SPV.
  • Senior debt may be provided by a commercial lender. This is secured by a first charge over the property.
  • The investor provides funding to the SPV by way of loan, secured by a second charge which ranks behind the bank.

Advantages:

  • Bank debt may not be needed
  • Flexible
  • Developer’s shareholders and investor(s) may benefit from entrepreneur’s relief on sale of project

Disadvantages:

  • Individually negotiated
  • Investor will generally require control rights over SPV

 

Development Finance Slide3

How it works:

  • The property is held in a special purpose vehicle (SPV) which is owned and controlled by the developer.
  • Senior debt may be provided by a commercial lender. This is secured by a first charge over the property.
  • A number of investors investors lend money to the SPV on the same terms. They do this by subscribing for loan notes issued by the SPV.
  • The loan notes are secured by a second charge which ranks behind the bank.
  • An independent party may act as a “security trustee”, to hold the charge for the benefit of investors.

Advantages:

  • Bank debt may not be needed
  • Developer retains control over SPV

Disadvantages:

  • Marketing must be carefully managed (including categorisation of investors and preparation of Information Memorandum etc)
  • Administration must be carefully managed

 

Development Finance Slide4

How it works:

  • The property is held in a special purpose vehicle (SPV) which is owned and controlled by the developer and a small group of investors.
  • The relationship between the developer and the investors is governed by a syndicate agreement or shareholders agreement, and by the SPV’s articles of association.
  • Senior debt may be provided by a commercial lender. This is secured by a first charge over the property.
  • The investors provide funding to the SPV by way of loan, secured by a second charge which ranks behind the bank.

Advantages:

  • Can maximise access to capital from existing contacts
  • Developer’s shareholders and investor(s) may benefit from entrepreneur’s relief on sale of project
  • Bank debt may not be needed

Disadvantages:

  • Marketing must be carefully managed
  • Syndicate must be administered carefully so it does not become a “Collective Investment Scheme”

Slide1

How it works:

  • The property is held in a special purpose vehicle (SPV) which is owned and controlled by the developer.
  • The developer appoints a crowdfunding platform which connects the SPV with a large number of investors.
  • The developer also appoints a corporate finance adviser, who helps the developer/SPV to prepare for the offering.
  • Senior debt may be provided by a commercial lender. This is secured by a first charge over the property.
  • Investors make loans to the SPV through the crowdfunding platform. The loans are all on identical terms, and are secured by a second charge which ranks behind the bank.
  • The crowdfunding platform monitors ongoing compliance with the terms of the loans.

Advantages:

  • Can be fast
  • Developer retains control over SPV

Disadvantages:

  • Fees and charges of crowdfunding platform and corporate finance advisor
  • Developer may need to provide personal guarantees

Need help?

If you would like help with your project or your business, you can contact us by email at info@lcnlegal.com, or telephone on
+44 20 3286 8868.