The use of debt is an integral part of property development and when used in conjunction with equity and joint venture partners it can help to enhance long-term returns. The use of equity capital, mezzanine finance within a joint venture structure brings all kinds of financial and commercial benefits. This type of arrangement suits the construction, conversion and renovation of property and here at Enness we have access to a wide range of lenders, investors and potential joint venture partners.
At the end of the day, it all comes down to the risk/reward ratio and if the figures add up and there is a practical exit/refinancing route then finding investment should be relatively easy.
A typical large-scale property development project would consist of senior debt, equity investment and an element of mezzanine finance. Similar in characteristics to short-term bridging finance, mezzanine finance tends to attract interest rates in the region of 12% up to 20%. However, the benefit of mezzanine finance is reflected in the enhanced value this investment can make to the business while not diluting equity shareholdings.
Mezzanine finance tends to be secured by a second ranking or second charge loan which is subordinate to the first mortgage lenders. This means that mezzanine finance providers stand behind senior debt holders in the event of default. However, this type of debt can be structured in a variety of ways with deferred interest payments in light of cash flow issues and/or the option to convert debt into equity. One additional benefit of mezzanine finance is the fact that the interest charges are tax-deductible thereby reducing net profits and tax charges.
Equity finance in its purest form is the provision of capital through the sale of shares in a project/business. An equity investment is not generally secured against any assets and is seen by many as having the largest risk/reward ratio. Finding a balance between equity finance, debt finance and mezzanine finance will require some calculations and forecasts for the future value of a property development. However, a successful property development should result in a significant uplift in capital value allowing senior and mezzanine debt to be paid off – leaving a return for equity investors.
Traditionally, equity finance tends to be a fraction of the debt finance element as this means investors have to inject less capital into the project. Finance providers and joint venture partners will all have a varying appetite for risk/reward which is what makes this market so competitive. We have arranged an array of senior debt, mezzanine debt and equity finance for our customers over the years. We have the contacts, the ability to talk with all lenders in the marketplace and regularly put joint venture partners in contact with each other.
It is very rare that joint ventures consist of parties with the same skills set and those simply looking to invest capital without a hands-on approach. Finding a balance between financial input and expertise in for example property development ensures that all parties have a role to play and are incentivised to achieve the best return. As we touched on above, it is possible to create any mix of equity finance, senior debt and mezzanine finance which equity partners are comfortable with. As a consequence, we have structured many deals where the equity finance is relatively limited but the leveraging effect through different forms of debt to fund the project leads to significant returns.
Call to discuss your requirements
We fully appreciate that every property development and renovation is unique. The project may require a different mix of investors and expertise, debt and equity. We have an array of experienced brokers who are able to discuss your requirements in great detail and structure an array of options for you. We are experts in bringing together joint venture partners in tandem with senior and mezzanine debt financiers, as well as structuring a credible exit route or refinancing on more favourable terms.