Which schemes need help?
Andrew Screen, GVA Financial Consulting, GVA
Tue 27th March 2012
Property development projects that require financial restructuring generally fall into one of four categories:
1) The income from sales/letting will be insufficient to meet the development costs or provide a profit to the developer, resulting in a financially unviable development. This is primarily due to a fall in sales values or over-payment for land;
2) The development is financially viable however the banks have reduced the level of debt funding (loan to cost) to mitigate their risk. The developer is unable to provide additional equity funding due to funding constraints;
3) The development is financially viable however the developer no longer has any equity participation (either due to the impact on their finances or reduced land value). The developer therefore requires equity or mezzanine funding;
4) The exit route (sale/lease) is no longer considered financially secure to a bank either due to the strength of covenant provided by the purchaser or tenant or level of pre-sales. This often occurs in residential developments where banks are unwilling to provide funding for speculative or partly speculative developments.
In the latter three categories, a local authority or public sector backed fund can assist in funding the development provided that the project is of significance to the local authority or fund (i.e. is part of the town regeneration, provides employment or key to the local authority).
The local authority can provide the following types of financial assistance, subject to these being state aid compliant:
- Debt funding, either replacing a bank or providing junior debt, this form of funding is usually provided to higher risk projects where the local authority requires primary security (a first covering charge over the land and development). This would typically apply in 2) above;
- Equity funding mezzanine;
- Equity funding joint venture;
by way of a joint venture or mezzanine funding for projects that have a lower risk and there is an opportunity for the local authority to make profit and improve the town. This would typically apply in 3) above;
- A guarantee can be provided by the local authority on the income stream or rental stream once the development is completed, this will enable bank funding to be obtained;
- An undertaking (guarantee or lease) to purchase or lease any residential units that are developed by the developer, but that are unable to be sold by practical completion of the development. This will enable bank funding to be obtained as the bank will have a secure exit.
GVA Financial Consulting can determine if a property development is suitable for local authority financial assistance and discuss your options and commence discussions with the local authority and funders.