Aligned Property Services

Funding Your Property Developments

Funding Your Property Developments

Property Development Funding

When you are starting to develop property, finance is one of the most important aspects for you to understand and manage throughout the whole process.

From small refurbs to large developments, there are multiple things to consider, and as we always advise, getting the team right for each development is critical. So, we will point out the key areas you may need support with in relation to funding.

Viability

Property Development is one of the most difficult areas of property to master, and is quite rightly seen as the riskiest part of property investing. It is very important to mitigate these risks by taking a professional approach.

It is important at the start of any property development to undertake thorough due diligence, using good quality information and methodology.

In order to undertake an appraisal of your property development, you will need to understand several key areas:

  • Exit options and values, Gross Development Value, and Income where applicable
  • Purchase price and associated costs
  • Professional fees, from planning to project management
  • Build costs throughout the development
  • Finance costs, interest, setup fees
  • Exit costs, such as agency fees.

Once you have understood all these factors, and you have a development opportunity you would like to pursue, it’s time to start thinking about funding.

Structure

The first step you will need to consider, which is so often overlooked or considered too late in the process, is how you structure your project financially to buy, develop, and exit the development efficiently and effectively.

It is worth getting professional advice at the earliest possible opportunity, and we advise doing this prior to the purchase of any new development project. Obviously, higher value and more complicated projects may need…

There are many ways that the company can be structured, from sole trader to limited companies or even special purpose vehicles (SPVs), which will make differences in funding approach. Tax considerations can be significant, even down to which bank accounts are available.

We align work with a number of finance and tax professionals who we collaborate with on behalf of our clients to get this right for their projects, to ensure they achieve the maximum return on their projects.

Funding Strategy

Now we have the development opportunity in place and understand our finance structure, we need to define our funding strategy. Part of this will be understanding what resources are already available and what elements of the development require funding.

Most developments will require some input from the developer, and the levels of which will determine how the finance is secured, and with whom. This is commonly referred to as skin in the game.

If you are early in your property journey or have limited resources of your own to contribute for whatever reason, then you may need high leverage, which may rule out some forms of traditional lending.

Securing Debt

Debt is the most common way to fund a development, but it comes in a variety of ways from different sources. Some of these are commercial specialists, such as banks and specific development finance companies, or could even be High Net Worth Individuals or family offices.

When securing commercial lending for your development, especially early on in your property development business, it is key to engage a good commercial finance broker to assist you in selecting a lender. Some brokers have specialisms in certain sectors, so it is important to also carefully select your broker.

Brokers do charge fees at varying levels so come at an additional cost; however, a good broker should be able to not only secure you the best lending terms with a strong lender and get the deal done quicker, saving you time and money throughout the process, but also guiding you through what is a complicated process.

Getting the right lender is critical, and it is equally important not to just focus on rates, but total costs of finance, and the lenders’ processes when it comes to monitoring, drawdowns, and how they approach issues throughout developments as projects are underway, which are frequent.

If you are looking to secure private investment, either from friends and family, business contacts, or from your wider network, you will need to understand the process and the regulations surrounding this.

Joint Ventures

Joint Ventures are often used to fund development projects, commonly where one party provides the funding, and the other party is responsible for the delivery of the development in order for a share of the profits or income from the deal.

There are lots of different ways they can be structured with numerous parties involved all carrying out different roles, but for the purpose of this article, we will focus on the simplest version.

Joint Ventures are a big commitment and should not be entered into lightly. With some development projects taking years, it is essential your goals and objectives are aligned throughout the development and everything structured professionally.

Clear roles and responsibilities, governance, and exit terms should be agreed from the very beginning. Getting a formal JV agreement drafted with a property-focused commercial solicitor is essential ahead of the development starting.

We have been involved in numerous joint ventures over the years, as investors and developers, and always advise getting help early on when considering this as a route to fund your developments.

Summary

Development funding is complex and requires a robust, professional approach to ensure you get it right from the start.

Over the last ten years, the team at Aligned have used a variety of our own funds, private and commercial debt, and have been involved in multiple Joint Ventures in property development.

We believe that you need to consider each development on a case-by-case basis and engage with the right people to maximize profitability on each opportunity.

If you are at the early stages of your property development business and would like support in raising funds for your next development or advice on how to approach it, please drop us a message/click this link to arrange an introductory call to see if we can support you on your next project.

Tony Houlihan
Founder & Director at Aligned Property Services | + posts

With a background in Procurement and a passion for property, Tony has been actively involved in the property sector since 2013. He took the leap in 2018 to focus on property development and has since developed over 25 homes, both new builds and conversions, across the North West.

Tonys’ goal is to make property easier for everyone, by connecting people with the right experts and knowledge to achieve their property goals, be that a bit of surplus income on the side or a full time career in their chosen area.

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