Module 05
Finance Secrets: Part A
In the finance secrets portion of the program, we unpack how to prepare for investors and attract development finance. So, what is the purpose of financing your development project? The main objective is leveraging your capital to its full potential. In this way, you can use a small investment to unlock a much larger project that by fully financing it yourself.
Leverage, otherwise known as gearing, is a unique advantage to investing in property over other asset classes. One of the implications of obtaining a loan is that we are effectively deferring payment of the development costs, giving us time to generating income by taking a product to market.
Developers can raise project finance (known as senior debt) from a variety of sources such as banks, private equity individuals or in syndication with other development partners. Raising money against a prospective development allows you as the developer to use time to your advantage, and trade with the commitments made by end-users (pre-sales) to obtain financial backing before a single brick has been laid in our development.
The following are some advantages of unlocking good development finance
Leveraged debt, so you can raise against your capital
Property is an immovable asset, which banks are eager to loan against
Flexible repayment terms can be arranged over a long period
Refinancing is possible, depending on exit strategy
A Financial Plan
To avoid risks and reputational damage, it is important to have a financial plan that describes the responsible management of funds in your development. Using input from your market research and the advice of your professional team, it is possible to make informed assumptions to use as inputs for projected income, expenses and sales values. In this way, we can build a financial model, including a development feasibility study, cashflows and repayment options.
During the feasibility stages, maintain a big-picture view of the development goals and plan these milestones to track your financial progress throughout the project. The essential financial information should be condensed into a financial summary (single A4 page) for easy reference and presentation to potential investors.