The development funding market has shown no sign of slowing down in recent months, enjoying both strong demand from borrowers and continued liquidity from lenders. However, the fact remains that for any successful scheme to work, cash (equity) remains king.
How much cash is needed?
The exact amount of equity required varies deal-to-deal and is affected by both the financials of the scheme in question and the financial covenants of the lenders providing the debt. In the current market, it is common for senior debt lenders to require anywhere between 10-20% of ‘hard cash’ in a deal.
Why managing cash reserves is so critical?
In basic terms, the pile of cash you have available can directly correlate to the number of schemes you can build out in a given time period. Therefore, it is critical that a developer endeavors to limit the amount of cash equity in any one deal and carefully manage their overall exposure between schemes. On top of limiting the number of schemes, using too much cash can hinder how opportunistic a developer can be when another ‘perfect’ site pops up.
The importance of reviewing strategy
It is a good idea to continuously review and where needed, adapt your funding strategy as you move from scheme to scheme. It is also essential to take a more overarching view to ensure that each development’s funding strategy fits in with this larger plan.
Limiting equity input by utilising different debt instruments
In order to limit the developer’s cash equity input required, we need to increase the level of debt leverage. We would look to structure the required facility using a mixture of senior debt, stretch senior debt, junior debt, and equity. The way this is structured and blended together will be the key to controlling the equity input.
At J3 Advisory, our capabilities transcend the entire equity stack. With sufficient insight into your current funding strategies and overarching objectives, we can deliver solutions that unlock the potential of your pipeline.