To fund a development, you will need ‘capital’. Capital can be either equity or debt or a hybrid of the two. How you choose to ‘layer’ the capital refers to the stack. If you’re buying and developing using cash from your savings and/or retained profits, this will be 100% equity. This capital stack (100% equity from the developer) is very unlikely for most SME developers; they will look to adopt almost the reverse! They will look to seek maximum debt leverage where they can as it can generate a higher return on capital employed plus it leaves equity available for additional projects as and when they arise.
*Disclaimer – with rewards come risks!
The most expensive (riskier) capital slice is equity. Debt is generally secured against the asset (land and/or property) via a first legal charge so if anything were to go wrong, the debt provider will have the comfort knowing they are more likely to have their funds returned to them and first. With equity, there is generally no security available; they risk their return and potentially their investment getting eroded first should there be problems with the development. The reward however is the chance to receive a higher return on their money than if they were providing it as a loan (debt). This return can either be provided as a percentage of the overall profit once the project is complete or via a high rate of interest.
Unless it is a joint venture set up, the developer will be required to input at least 10% equity. The remaining 90% can be made up of a mixture of senior debt, stretched debt, mezzanine finance and/or further equity.
There is no right or wrong way to capital stack, it is very much derived by the developer’s available equity, intended distribution of returns and the project itself. It’s a very bespoke process and no two deals are the same however it will fundamentally be derived and stacked starting with the equity element. Finding your next route, your solution,
Dependent on the developer’s experience, equity funding will become easier to access with more experience. New developers may initially use their own funds and that of family/friends but as more experience is gained and larger opportunities arise, this equity can be supported via professional investors. Equity structures are generally based on profit split (but not necessary 50/50). Equity will adopt a very tailored approach: one size does not fit all.
This also applies to mezzanine finance, commonly used to replace some of the more expensive equity. As mezzanine finance (junior debt) sits behind senior debt via a second charge, it will charge a higher rate of return.
As already said, there is no right or wrong way to structure your capital stack. But you must make sure the solution works for you in terms of the balance between risk and reward. Your track record, the deal itself and your ability to navigate through the different sorts of capital providers drives your property development funding.
*Disclaimer – with rewards come risks!
The most expensive (riskier) capital slice is equity. Debt is generally secured against the asset (land and/or property) via a first legal charge so if anything were to go wrong, the debt provider will have the comfort knowing they are more likely to have their funds returned to them and first. With equity, there is generally no security available; they risk their return and potentially their investment getting eroded first should there be problems with the development. The reward however is the chance to receive a higher return on their money than if they were providing it as a loan (debt). This return can either be provided as a percentage of the overall profit once the project is complete or via a high rate of interest.
Unless it is a joint venture set up, the developer will be required to input at least 10% equity. The remaining 90% can be made up of a mixture of senior debt, stretched debt, mezzanine finance and/or further equity.
There is no right or wrong way to capital stack, it is very much derived by the developer’s available equity, intended distribution of returns and the project itself. It’s a very bespoke process and no two deals are the same however it will fundamentally be derived and stacked starting with the equity element. Finding your next route, your solution,
Dependent on the developer’s experience, equity funding will become easier to access with more experience. New developers may initially use their own funds and that of family/friends but as more experience is gained and larger opportunities arise, this equity can be supported via professional investors. Equity structures are generally based on profit split (but not necessary 50/50). Equity will adopt a very tailored approach: one size does not fit all.
This also applies to mezzanine finance, commonly used to replace some of the more expensive equity. As mezzanine finance (junior debt) sits behind senior debt via a second charge, it will charge a higher rate of return.
As already said, there is no right or wrong way to structure your capital stack. But you must make sure the solution works for you in terms of the balance between risk and reward. Your track record, the deal itself and your ability to navigate through the different sorts of capital providers drives your property development funding.
