Debt Finance – Commonly referred to as “senior debt” and provided by the lender either upfront (land purchase loan) or progressively (construction loan) at an agreed interest rate over a fixed period (usually 12-18 months). The debt is usually secured via mortgage document agreement that is drawn up between a borrower (developer) and lender (financier) which is registered as either a first ranking or second ranking mortgage on the title deed.
Equity Finance – These are funds provided to a developer (project sponsor) to assist with project costs. An equity finance position carries a greater level of risk as the return on equity (ROE) relies on the skill of the developer and market forces. Returns are generally in the form of a split of profit share that is agreed between the parties in the form of a shareholders agreement or Joint Venture (JV) agreement.
Preferred Equity Finance – Similar to debt finance but not as secure as any debt loan ranks ahead (1st or 2nd ranking mortgage on th title deed) in receipt of project proceeds at the end of a project. A preferred equity (PE) investment is usually in the form of a written agreement that outlines the terms of the investment. A pre agreed interest rate or coupon rate that provides a return between 18-25% on funds is common. The preferred equity initial investment and any agreed returns are paid out prior to the developer receiving their funds at the completion of a project and should reflect the risk profile and profitability of the project.