The vast majority of property developers and construction companies fund their projects externally. More often than not, it simply would not be feasible for them to cover the full costs of their projects out of their own pockets.
Particularly for those looking to conduct multiple projects at the same time, third-party development finance is essential.
But even then, it is not uncommon for developers to find that some of the more ambitious projects they had in mind are out of their reach financially. They know they could make a success of the project if they could cover the costs, but it is not something their budget concurrently stretches to.
The Benefits of Joint Ventures
This is where considering a joint venture development finance solution could help. Also referred to as equity development finance, joint venture finance is a special type of loan issued when two or more developers join forces.
By pooling their resources, their knowledge, their expertise and their budgets, the parties working together can undertake far more ambitious projects than would be possible alone. The facility works in the exact same way as conventional development finance, though is issued on the basis of a workable collaboration.
This ‘strength in numbers’ approach to property development and construction projects brings many benefits. All risks are shared evenly between the parties involved and the combined knowledge and experience of those taking part can make for a more successful and profitable outcome.
In addition, joint venture development finance can sometimes be issued with a much higher LTV than a standard development loan. Typically, development finance specialists issue loans with a maximum LTV of 60% to 80%. This means that the developer has to come up with the remaining 20% to 40% – either out of their own pockets or by way of mezzanine finance.
With joint venture development finance, a first-charge loan can be arranged to cover anything from 90% to 100% of the total project costs. This is subject to strict terms and conditions, based largely on the experience and track record of the applicants. In order to qualify for funding at this level, lenders expect to see extensive evidence of successfully completed projects of a similar nature.
The lender will also need to see a formal proof of a workable and viable exit strategy, outlining exactly when and how the money will be repaid.
What Can Join Venture Property Funding be Used For?
JV property funding with a high LTV is available from around £500,000 to £50 million or more. This makes it ideal for covering the costs of more extensive and ambitious property development and construction projects.
Aside from the higher LTV and maximum loan size available, JV property development funding works in the same way as conventional development finance. The funds raised can be used for almost any legal purpose, including but not limited to the following:
- Conversions of existing properties
- New builds of commercial and residential properties
- Commercial developments
- Flat developments and renovations
- Extensions structural alterations
- Mixed-use properties and conversions
Where an application for JV development funding is granted, the funds are released to the developers gradually in a series of instalments. These instalments are tied to the completion of important project phases, overseen by a surveyor hired by the lender (and paid for by the borrower).
Throughout the term of the loan – which can be anything from one month to 24 months – interest accrues on a monthly basis (usually around 0.5% or less). No monthly repayments are needed, as the full interest payable can be rolled up into the final loan balance.
Development finance is typically repaid when the development is sold at the conclusion of the project, or a longer-term facility (such as a buy-to-let mortgage) is taken out to refinance the original development loan.