Creating Fundraising Structures for Developers

When an asset manager or high net worth individual wants to set up a property development, one of the first questions that arises is how to structure the funding. There are many options, and we can guide you through them.

Choosing the funding structure that’s right for you requires thinking carefully about what you’re willing and able to do – for example, how much equity will you contribute, how much control of decision-making are you willing to give up, will you be able to manage arrangements with many investors? And many more questions. It’s also essential to set everything up correctly, with the right legal arrangements in place.

We can help you with both of those things.

Our free Guide for property developers on how to structure projects with private investors explains five of the most commonly used funding structures for property developments. Two of them are covered elsewhere on this site: property syndicates and joint ventures. Here’s a very brief summary of the other three.


Mezzanine loan

Often used when much of the necessary funding is coming from bank lending, but an additional investor or ‘mezzanine lender’ is needed to provide the rest. It’s important to realise that the bank gets repaid first, then the mezzanine lender. Any additional profits go to developer.

There are several advantages. It’s simple to set up, the developer retains control over the development, and the investor may receive a share of development profits in addition to (or instead of) interest calculated at an agreed interest rate.

However, the developer usually needs to contribute equity to set up the SPV, and it may not be tax-efficient for the investor.


Loan notes

An option when there are dozens of outside investors, and it is not practical to negotiate individual terms with each of them. The investors all participate on the same terms. These are legally set out in loan notes.

Potentially not needing bank debt is an advantage of this structure, as is the fact that the developer retains control. However, marketing to investors is regulated and must therefore be carefully managed. The same is true of the ongoing administration of the arrangements over the life of the development project.


Crowdfunding (peer-to-peer lending)

This can be a solution for property developers that don’t have existing contacts with potential investors. An established crowd-funding site or peer-to-peer lender can be a fast way to attract all the investment required without borrowing from a bank.

Of course, the crowdfunding platform will charge for its services, which can be expensive. Note too that the platform will usually have a first charge over the underlying project, and that the developer may have to provide personal guarantees.

On the upside, this approach can be quick to arrange, and the developer retains control.

We Can Help

We can help you to decide which structure is right for your project, and then put all the essential legal agreements in place. Contact us any time at info@lcnproperty.com or +44 20 3432 3269.

Call us:+44 020 3432 3269(Monday - Friday, 9am - 6pm GMT)