Private funding and legal structures for property development: start with the end in mind

With property developer projects that involve private investors, it’s essential to structure the arrangements in the right way. Failure to do so can increase risks in many areas, from tax to legal disputes and regulatory compliance costs. To begin the process of establishing which approach is right for your particular situation, you need to ask yourself some foundational questions.

When property developers bring in private investors, everyone usually shares a very similar view of what success looks like: healthy profits, no unexpected tax charges, and no difficult disputes between the various parties involved. All of those things depend on having the right funding and legal structure in place.

There are several options, both for the fundraising strategy and the legal structure that supports it. It’s important to put these basics in place before you start to incur costs or make profits, as it is usually disadvantageous to do so afterwards.

At LCN Property, our lawyers have been advising property developers for over 20 years. We’ve found that the best way to ensure that you make the right decisions is to systematically work through a process. Starting with the big picture: what you want to achieve, and what you can offer your investors.

What you want to achieve

What are your short, medium and long-term objectives? Is it to finance a one-off project? Is it to build deep relationships with a small number of investors, who can partner with you on multiple projects? Is it to establish the infrastructure for a property development business with its own brand in the market? Is it to become known as a trusted fund manager or asset manager?

What you can offer investors

Consider how you can establish credibility and reduce investors’ risks. Can you present potential investors with an attractive track record of similar projects? Can you demonstrate a pipeline of future projects? Can you support your messages to investors with media assets such as a blog, a market reputation as an expert, and so on? Are you willing to give personal guarantees to investors and/or lenders? How much control over decision-making are you willing to give up or share? To what extent you are willing and able to be transparent about your business and your processes for managing developments?

An important aspect of your offer to investors is your own knowledge and skills. Do you already have contacts and connections with potential investors? Do you have the skills and the appetite to manage arrangements with more than one investor – perhaps with dozens of investors?

There is a financial aspect too, of course: how much equity are you willing and able to contribute? Do you need working capital to fund your own overheads as a business (staff costs, for example), in addition to development capital?

Other issues

Once you’ve considered all of that, you’ll need to think about tax and other charges. Are your prospective investors likely to be located overseas? If so you may need to consider issues such as withholding tax on interest. Do you and your investors want to benefit from Business Asset Disposal Relief (BADR) or Investors’ Relief and potentially Inheritance Tax (IHT) relief? Will the land for the project be contributed from a land bank at developer level? If so, then degrouping charges may apply.

Once you’ve established all of this, it should start to become clear which funding structure is the best fit for the project. This in turn will suggest an effective legal structure. And with that in place, your chances of bringing the project to a successful conclusion will significantly increase.

For more practical guidance on all aspects of property investment and development, check out the Resources section of this website.

Important notice

Nothing in this blog post is legal advice, and it does not cover related topics such as how to promote the project and attract new investors while complying with FCA regulations.