Equity funding for property developers is money invested in development projects by external parties. These parties could be private individuals, institutions, or funds.
Equity funding is different to debt provided by a bank or non-bank lender. Banks and lenders lend to property developers at an agreed rate of interest and generally cover a large percentage of project costs: sometimes, up to 90%.
But equity funding can be provided at a rate of interest (sometimes known as a coupon) or for a share of the development’s profit. In some cases, the equity funders ask for both a coupon and a profit share.
What costs does equity funding cover?
Equity funding covers a much smaller percentage of project costs than debt. Property developers use external equity for costs not covered by debt or their own capital. For example, a bank might lend money that covers 80% of a developer’s project costs. If that developer has capital of their own that covers 10% of their costs, they might use external equity to cover the remaining 10%.
In practical terms, equity funding usually allows property developers to acquire the land on which they want to build. Debt from a bank or lender will cover build costs and professional fees, with whatever’s left over going towards the cost of the land. Developers use equity to meet those residual land costs in full, along with any capital they put in themselves.
Who provides equity funding and why?
There are different types of equity investor. For example, High Net Worth Individuals (HNWIs) invest their own personal wealth into development projects. Family Offices invest capital owned by wealthy families (sometimes acting on behalf of several families at once). And property funds invest allocations from large institutions, private equity funds, or regulated collective investment schemes.
What these different types of equity investor have in common is that they all seek development projects to invest in. This is because property development usually offers a high Return on Investment (ROI).
For example, the equity investors Mackenzie Byrne matches with our clients typically want to see a 30% ROI. As mentioned above, this can be achieved by structuring deals in different ways: through a rate of interest (coupon) and/or a profit-share.
Negotiating with equity funders
But property developers are never entirely at the mercy of equity investors. Developers might need equity, but investors need to invest! This means that developers can structure deals to their advantage.
For example, we recently structured a deal for a client on a profit-share basis. With the first £300k in profit, two thirds went to the equity investor and one third to the developer. Profit above this figure was then split in reverse: the developer got two thirds and the investor one third. This meant that our developer client benefitted from any increase in profit during the build period (as a result of rising house prices, for example).
Looking for equity funding for a development project? Contact us and find out about our network of equity investors.