100% development finance, or joint venture (JV) development finance, allows experienced developers to obtain 100% funding for their building projects.
In return for their finance and assistance, the JV partner will want a share of the profits.
What is 100% Development Finance?
A developers access to cash is key to their success. Without funding to purchase land or development sites quickly, profitable deals are lost. 100% development finance can provide access to funding, specialised skills, shared risks and growth opportunities.
100 per cent development finance is a scheme that allows developers to purchase and develop a site without having to commit their own funds.
The lender/investor will fund the initial acquisition and then continue to fund the build as the stages progress until completion.
These types of schemes are also referred to as Joint Venture (JV) development finance or equity development finance. The Joint Venture (JV) partner will be covering all of the financial risks as no money is needed from the developer.
In return for providing all of the finance, the JV partner will take a stake in the project and will usually request 40-50% of the sale profits.
How does JV Development Finance Work?
As with most development loans, the funding is drawn down in stages. The first tranche will be to acquire the site or land, with full planning consent in place.
The build costs are released in stages with the lender inspecting the site at each interval.
The interest charges on the loan, and any fees, are agreed with the lender and are reflected in the profit split percentage. If interest is charged on the loan, this can be ‘rolled up’ and paid at the end.
The JV partner will provide support for the project with site meetings and progress reports.
On completion and sale of the finished development the profits are split between the developer and the JV partner/lender. This is often 60/40 but it will vary from deal to deal.
Joint venture funding can be used for:
- Ground up developments (land & build)
- New builds
- Conversions and extensions
- Mixed use and commercial properties
PERSONAL GUARANTEE (PG)
Lenders that are putting up 100 per cent of the funding for a project will usually need personal guarantees, or PGs, from each developer involved.
A PG provides extra security for the lender and means that you could be personally pursued to cover unpaid debts using your own assets should the project fail.
SPECIAL PURPOSE VEHICLE (SPV)
It is normal for the project, and all of its assets, to be held within a newly set up limited company. This is known as a Special Purpose Vehicle or SPV.
The developer and JV partner will both be shareholders in this company and also directors. An agreement will be drawn up documenting the timeframe agreed and financial aspects including the profit share.
What are the benefits of 100% JV Finance?
The main benefit is that your project will be fully funded by the lender or JV partner. For most developers this means that they can get projects started quickly and grab opportunities when they arise.
For the developer the main benefits are:
- 100% funding for experienced developers
- Secure funding from just one lender
- Reduced financial risk
- Rolled up interest
- Quick lending decisions
Working with a joint venture development finance lender allows developers to make progress quickly and develop more sites. Although all profits are shared, the developer can take on more projects without the need to tie up all of their own capital.
How do I qualify for 100% development finance?
Where a lender is putting up 100% of the funding, they need to be comfortable with the developer and the project before committing to lend.
The deals have to make sense and be profitable. Joint Ventures are a kind of partnership and there’s quite a lot of due diligence that takes place as each case is individually assessed.
Here are some basic criteria:
Be an experienced developer
You should have successfully completed at least one similar development prior to application. 100% funding is only given to experienced developers with a strong track record.
While developers with a clean credit history are generally considered lower risk, most lenders are happy to ignore missed payments and minor defaults.
JV lenders will want to see a strong business plan showing a profit margin of at least 25-30%. This profit will be split between the lender and the developer on sale.
JV lenders need to maximise their returns. So the minimum GDV will be £1m.
The project term should be a maximum of 24 months.
As with all development loans, the strength of the exit strategy is very important to the JV lender. This is most likely through sale of the properties but the strategy behind this including pricing and marketing is equally important.
Detailed planning consent must be in place. Full planning permission will always be required by a Joint Venture lender prior to application and is therefore funded by the developer. Planning gain finance can help to initially acquire a plot or building with the aim of obtaining consent to develop.
How are Joint Venture applications assessed?
With the lender putting up all of the money, JV applications are assessed very carefully.
You need to be able to achieve all of the points listed above, especially:
- Successful track record
- Sound exit strategy
- Good profit margins
Projects need to have a minimum Gross Development Value (GDV) of £1m with profits of 25-30%.
How can I improve my application?
It’s important for the lender to see that you have the right experience for the type of project you wish to fund and also that all of the risks have been identified and are understood.
Include in-depth research and analysis in your plan and allow the JV lender to fully understand the project and how you can make it work.
We can review your proposal to see if it includes all of the right elements that the lender is looking for.
What if I cannot get 100% funding?
The advantage of joint venture funding is that all of the finance is provided by one organisation who has a vested interest in the success of the project.
If the JV lender is not confident enough in the project to put up all of the money then additional security can be used to top up the funding. By using other properties (buy to let/commercial) development finance or bridging finance can be raised to cover the shortfall, still providing 100% of the costs.
JV lenders are in the business of funding projects and being rewarded with a share of the profit. This business model does not allow for 100% funding, just getting back the loan interest and no profit share.
It is possible to obtain development finance without putting down a cash deposit or profit sharing.
This will involve bringing other security to a lender to raise the money needed.
Cross-collateralisation is also a possibility. A cross-collateralisation loan essentially means a lender taking a charge over two or more properties so that the deal ‘works’.