What is Joint Venture (JV) Funding?
Joint Venture (JV) funding, or Equity Finance as it is sometimes called, is often seen as an important tool within a property investor or developer’s toolbox. There may be many reasons for this, not limited to an inability to fund a project, or having free capital to spare for a new development or investment to commence.
Joint Venture funding may in some cases be carried out to share the skill sets across two different companies. Even with larger developments in today’s marketplace, you may often see developments that are in Joint Venture agreements with another party to achieve the completion and construction of a particular project.
How Does Equity Finance work?
Equity finance may be sought more often than not from parties who do not want to supply 100 percent of the equity finance on a particular project, perhaps because:
- They may have funding tied up in other projects.
- They’re experiencing time delays caused by construction lags on other projects.
- They simply do not want 100 percent of the equity risk in the project.
Equity finance is the layer of funding that is required over Senior, stretch senior or Mezzanine finance.
Lenders may be able to achieve up to 95 percent of the overall development costs, however, they are still looking for the remaining funds to enable the realisation of the project in question. Equity Finance is the tranche of funds that is subordinated to the senior debt and mezzanine loans on the development.
Although it is discussed a considerable amount within the property development sector, more and more property investors look for equity investments for projects that may require refurbishing or alternatively with potential other angles to increase value. This may be:
- Extending leases to commercial tenants.
- Improving existing revenue or building portfolios to sell on to institutional investors.
- Achieving planning gains that increase the value of the property or site.
More often than not the developer or the investors experience and track record is looked at in great detail as the provision of equity finance is the most risky part of the capital stacking that exists on a project. It is therefore important that the equity providers are investing in individuals who can deliver the overall strategy and have experience and track record in this area.
What is Preferred Equity and Common Equity?
- Equity
- Mezzanine
- Senior Debt
The equity piece as illustrated above can be broken down even further to what is sometimes described as preferred equity and common equity. Preferred equity tends to sit above the mezzanine tranche of funding and often includes a percentage return ( for example 6-10 percent) plus a percentage of profits.
Common equity is usually the top tranche that sits above the preferred equity and the most risky part of the capital stack. It often provided by two parties often referred to as a Limited Partner and a General Partner. The general partner is the sponsor who is actively involved in running the project on a day to day basis whereas the Limited partner is the party that is fulfilling a role of a passive investor.
It is very important that if you are looking at investing as the equity provider or as a co-investor in a scheme as a means of getting your foot on the property investment ladder that you have carried out your own due diligence into both the project and the individuals behind it.
However as the equity position is weighted as riskier this often carries a greater return and potential upside.
What is the Risk of Equity Finance?
Providing equity to a property project is the most risky position. Debt and monies owed are often the last to get repaid unless otherwise stipulated.
What are the Costs Associated with Equity Finance?
Equity finance is often less prescriptive than terms that are delivered by senior finance providers. The equity providers may charge a mixture of the following:
- Arrangement fees
- A preferential interest rate
- A percentage of the project overall
- They may also charge additional fees for extensions as well as due diligence fees in some cases.
As due diligence fees are often nonrefundable, it is important to only pay these if you are confident that the equity provider is reputable as these fees may often not be returned if the due diligence does not pass the equity providers internal checking.
Many equity providers may ask for additional forms of security on the project. This may be more than a charge subordinated to a first / potentially a mezzanine lender. They may also require personal guarantees as well as debentures even if these are not first ranking.
What will Equity Providers Want to See in an Application?
There are numerous providers of equity funding for real estate projects throughout the United Kingdom. These range from property investors and high net worth individuals, to real estate funds, family offices and institutional investors.
If you are seeking investor participation from individuals it is important to ensure that you do not vicariously create an unregulated collective investment scheme which is a regulated investment under UK law and FCA regulations.
Equity providers will want to see a strong pack on your project and it is important you are able to demonstrate the following:
- A strong track record and experienced sponsor or team.
- A good understanding of the project and costs.
- An accurate analysis of the sales and or values.
- A thorough knowledge of the marketplace and potential end buyers.
This can be shown and illustrated in a comprehensive due diligence that includes items such as
- Track record and CV with example of the team’s past projects including company advisors and professional team.
- The structure of the transaction and the corporate structure chart
- An executive summary of the project
- A collection of all key planning documentation and reports
- A project appraisal
- An in-depth cash flow of the project.
- Any comparable evidence of sales if possible
- Information on the area and location
- Strategies to reduce elements of risk on the project. This may include a pre sale strategy or reservation fees or pre lets which may be achieved for commercial premises.
Provide has a wealth of experience helping our users apply for JV and Equity Finance. We can go over your options with you to ensure you get the best possible rates. When looking into high-risk finance solutions, it’s important to take each step slowly and have a team you trust.