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Equity

What exactly is Equity, in Property Development circles?

Strictly speaking, Equity is the value of an asset less any debt, such as loans or mortgages against it. In the Property Development world, Equity could also be the cash sum a developer puts in to a project (usually towards the land purchase) to buy and develop it. Alternatively, equity could be value created (less any debt) by a planning uplift. Most developments would require a development finance loan to make up the difference between the equity which the borrower puts in, and the total project costs.

As well as the borrowers’ own equity, sometimes third party equity is needed, from an Equity Investor, particularly if the borrower does not have enough cash (equity) to make the finance package work. Equity Investment is often invested into a project in return for part ownership of that project. This could be shares in the company or a profit share with a priority return on the funds invested. Equity Investment therefore allows the Developer to “unlock” development finance for the project.

What is Equity used for ?

Equity funding comes into play when a developer needs more finance than Senior, Stretched Senior and/ or Mezzanine can provide, and usually at the cost of a profit share. Where Stretched Senior Debt and Mezzanine are usually capped at 90% of project costs, Equity providers can fund up to 95% or even 100% of project costs, either in their entirety, or in a second charge position, behind a Debt funder

Given the equity funder is investing in the developer as well as the scheme itself, a developer has to be sufficiently experienced to attract an equity investor.

Equity can be used for Planning Gain deals as well as developments, if the Equity provider has the confidence in the proposal, and the project “sponsor” (i.e. the developer).

What are the Key Features of Equity?

Up to 100% of the Equity Requirement.

Investments from £100,000 upwards.

Equity Investments are injected “upfront”, or at the start of a scheme.

Available throughout the UK

No PGs required from some Equity providers.

Term length will often match that of the senior debt, and sometimes longer.

What are the Equity Lending Criteria?

Developer needs a proven track record, with a good reputation.

Solid Business Plan.

Excellent understanding of their chosen market

Strong and Stable financial position

What Information do you need to progress an Equity loan?

Company details

Detailed CV or Biography for the developer/ borrower

Last 3 years accounts, if applicable

Detailed Executive Summary

Detailed financial appraisal and cash-flow.

FAQs

What does “Developer Equity” mean?

A lender refers to Developer Equity as the amount of cash which a developer has in, or will put into, a development project. This could be in the form of “hard” cash i.e. pound notes, or “soft” equity which could be the extra value a developer has created from a planning uplift, for example.

Who can provide Equity for a property development project?

As well as the developer/ borrower putting in their own equity towards a scheme, other 3rdparty equity providers can also contribute some funds. Often such equity providers will require a profit share, given they are putting in the “seed” capital, alongside the developer. These equity providers might be lenders, private investors, or companies set up specifically to facilitate or find equity for such purposes.

What is a “Capital Stack”?

The Capital Stack is made up of the component parts of the finance jigsaw. So, it could consist of Senior Debt (i.e. the main part of the funding, secured on a first charge basis), Mezzanine Finance (“top-up” funding, secured on a second charge basis), and Equity, which is basically the amount the developer has to contribute – like a deposit. The Capital Stack is often shown as a “chart” or a visual depiction of how a project is funded.

How much will Equity cost?

Given Equity is often unsecured, the equity provider would usually require a profit share. As it is unsecured, it is high-risk, and therefore commands a high reward.

How do I find an Equity provider?

That’s where we come in. Perhaps the more important question would be “how do I choose an equity provider?”. There is no set parameters or cost of equity finance, and as each deal is bespoke, your choice will come down to not only the cost, but also the conditions which each equity provider might impose, such as a minimum return on their money.

Will I need to give a PG?

It is unlikely you will need to give a PG

Will I need to give away a share of the profits?

Yes, most equity investments require a share of the profits.

What type of schemes will an Equity Investor invest in?

Residential Schemes, Private Rented Sector (PRS), Build to Rent, Mixed Use Schemes, Care Home Schemes and Student Accommodation, Commercial schemes, Industrial schemes and so on.

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