Funding 

One of the major advantages with property development is that we can be creative with the means of funding the project, and we are not bound by one source or route of development funding, and funding routes will need to be tailored to each project. 

 

Most property developments are going to be funded using equity and/or debt funding. Often it is a combination of both.

 

Generally, the more debt we use a project, the more we lose control and are reliant on third parties, however the more equity we put into a project, the more risk we are taking on.

 

Debt

Debt funding is where finance is sourced from third party lenders which is generally secured against the assets of the project, assets of the company or other given security.

Debt funding can be split into three main categories, short-term finance, medium-term loans and long-term mortgages. The suitability for some of these for property development is not always clear and it will depend on the project itself:

1. Short-term finance is known as bridging, and this is typically a loan of up to 3 years. Bridging is often suited to smaller scale developments or situations where an alternative funding package is being negotiated, so the bridging loan can facilitate a development action before another debt funder is introduced.

2. Medium-term loans are known as development finance and will include senior debt and mezzanine finance. This is the most common type of debt funding which is used for property developments.

3. Long-term finance is where mortgage is taken out and this is only suitable for certain types of developments with the developer wishes to retain the asset after completion of construction.

 

Equity

Projects which are funded with the use of equity will be done so using our own resources. Equity is typically an investment into the project and is not secured against any assets.

Essentially equity involves taking a share of the project, so when a project is set up an SPV company, any equity investor would be a shareholder.

Equity provides a lot more flexibility, however there is a lot more risk given that more of our resources are invested.

The amount of equity in any project will also depend on the project itself, the amount of debt funding which can be secured and the appetite of risk.