What is equity finance, & how does it work? [Part 2-2]

Admin_Edge · 18 July 2022 09:26

Continued from…

What is equity finance, & how does it work? [Part 1-2]

How to prepare an investor information memorandum?

To persuade investors to put their money into a project, you must persuade them that the risk will be worthwhile. The investor will require all necessary facts and information about the project offered in an investor package to make this decision.

The package should include the parameters of the land transaction, financial estimates, capital loan requirements, and any other information needed to raise the necessary equity for the project to move forward.

The following is a general list of items that can be included in the package, although it is not exhaustive; the more high-quality material offered, the better for assisting the investor in making a decision.

Introduction to the project

A quick overview of the property - a quick overview of the land deal

Overview of the area

A map illustrating the location of the place
Basic facts about the state, such as population, income, jobs, and governance.
Basic facts about the city, such as population, income, jobs, and government.
Demographics, income groupings, traffic information, housing, local government, and other neighbourhood information

A development team

Developer
Development manager
Project manager
Town planner
Architect
Quantity surveyor
Structural, civil, mechanical, and traffic engineers
Environmentalists
Marketing consultants
Solicitors/accountants
Any other advisors

Design details

Sketch plans and elevations
Design concept
Site development plan
Point of view
Any additional visual architectural information

Construction

Landscaping and parking
The type of construction
The type of external material
The type of internal finishes
Landscaping and parking
The type of construction
The type of external material
The type of internal finishes

Information on renting

Gross leasable floor areas
Tenant profile
Per-square-metre rental rate
Lease terms
Rent escalation
Costs for communal areas
Tenant allowances and concessions

Investment vehicle

Current owner’s information
The type of new investment vehicle

Program

Design program
Building program
Leasing program

Feasibility of investment

Calculate development costs
Calculate income
Capitalisation rate
The internal rate of return

Understand the concept of property development feasibility

Financial forecast

Investment performance forecast - sources and sources of proceeds - cash flow prediction
Taxable income (loss) forecast
Resale forecast

Offer

Ownership type
Investment unit size
Deadline
Risk warning

The State Commission regulates developers that offer equity or participation in development as a form of investment. Before an investment group becomes a public offering, the number of investors who can participate is limited.

The investment package, presented in an appealing brochure, should be written professionally and accompanied by graphics and images. Use a graphic designer or an architect to help with the layout, and make sure the document is printed and bound professionally.

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How to raise equity?

Finding qualified investors is one of the most challenging tasks for a developer in the early phases. Significant challenges are identifying the correct potential investors, persuading them to invest, and accomplishing this before the market opportunity is lost.

Here are some helpful hints on the method and working with investors that will aid you in achieving your goal of raising equity finance.

Prepare yourself

The developer must first understand potential investors’ investment strategies and preferences to identify and pursue them. Developers are sometimes overly optimistic about their projects, but the investor may not be.

A developer must understand how investors think to connect effectively with them. Investors consider you and your idea in terms of business and equity finance, and they assess you and your proposal based on these considerations.

You’ll be in a better position if you learn investor lingo and demonstrate excellent business abilities. This necessitates your participation.

Effective communication: When seeking equity for a project, it’s simpler to acquire a potential investor’s trust if the developer understands the investor’s needs and background and, more crucially, listens more than he speaks.
The one-sided character of over-selling is the most significant impediment to healthy communication. It is considered preferable to listen than to speak to determine what will inspire the investor to part with their money.
Observe body language: Communication is more than simply words said. We all communicate more through gestures and facial expressions than words. Paying attention to the potential investor’s body language can give you a decent idea of the discussions and their interest in the business.
Avoid misinterpretations: It is critical to avoid any misinterpretations during negotiations. This is best accomplished by paying close attention to the prospects’ responses.
Sell trust: Convincing potential investors that you are trustworthy and credible is half the battle when engaging with them for the first time. Be honest and professional when answering questions, even if some of them seem daunting.

Choose investor carefully

A developer should choose an investor not just based on the money they can contribute but also on the value they can add to the project by:

Their experience with similar projects
The management roles they held in investment projects
Their connections with other potential investors
Their relationships with service providers who can help with the project
Their community profile
Their personality and compatibility.

Getting introduced to an investor through a referral source will increase your chances of getting funding. All developers should have a reliable and trustworthy referral network.

Learn More

10 Financial property investing mistakes made by investor

How to introduce the project for raising equity finance?

A developer may have less than three minutes to introduce the proposal to a potential investor during the first meeting. Investors are busy people who don’t have a lot of spare time. As a result, this introduction will either make or break the deal.

A professional developer who is well prepared for this meeting with a brief, detailed oral presentation will create an impression. The following is a list of crucial information that one should cover on a single page:

The development project, its potential and returns, the market research conducted, the marketing techniques planned, the leading managers, consultants, their backgrounds, the amount of financing required, and how you are going to use it.

If the investor is interested as a consequence, they will most likely request a copy of the feasibility study or the investor package.

Final negotiation and closing of the deal

Most investors prefer to structure transactions themselves; therefore, developers should be flexible in their approach. The investor may present a fundraising package that includes various financing options.

Because the funding package is complicated and significant, it’s a good idea to counsel an attorney first.

Investors will assess the risk of a proposed development project and combine it with the required rate of return on equity to determine the type and amount of investment they are willing to undertake in exchange for a percentage of equity equal to the risk.

Using a competent financial advisor

Finding an experienced equity finance consultant or broker to raise the equity is an option for a newbie developer who has never raised money for a project before and lacks the confidence that comes with expertise.

These consultants should have direct ties in the real estate market, but they should also have a track record of successfully raising equity finance in the past. While the investor will wish to speak with the developer personally, a consultant can help with the introduction.

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How to increase equity step-by-step?

Property development is one of the few industries where entrepreneurs are rewarded for their efforts in creating value significantly. They assume the most significant risk in constructing a new development and, as a result, should be rewarded the most.

It’s an art to produce significant returns for equity participants with the least amount of capital by combining vision, experience, and commitment. The phased procedure for increasing your equity value during the development of a project you started is outlined below.

The strategy demonstrates how you can control the process at each stage by selling a percentage of your shareholding only after adding value to the project. This method is best used for large-scale residential or commercial developments that require a lot of money.

Stage 1: Purchase of land

Purchasing and settling on a development site is risky, especially if you have not yet received your project’s DA (development approval). The options are to secure development rights over the site, form a JV (joint venture) with the landowner, or negotiate to buy the land subject to obtaining a DA.

Each choice has its quirks that you should consider but, the goal is to secure and manage the land with the least amount of money out of your pocket.

Stage 2: Approval for pre-development

The next step is to raise seed funds for the papers required for the DA once you have control of the land. The seed capital needed is typically 1% of the total development cost.

You can raise seed capital from various sources, but what can be delivered in exchange? Here are a few examples of structures:

A convertible equity finance loan allows the lender to convert the loan to equity once the DA has been approved. Because a DA application is still hazardous for the lender, they will want a considerably greater rate of return, ranging from 20% per year to 3% per month.

A caveat on the developing property or some other asset that you can supply can provide security. Some lenders may require a personal guarantee in addition to other forms of collateral.

FOLLOWING THE DA’S APPROVAL, Class A Preferred Shares can be converted into ordinary shares. Class A shares’ value varies and is determined by the project nature, risk, and expected profit. If a seed investor contributes 1% of the development cost, they can expect to own 5 to 10% of the development business.

Stage 3: Approval for post-development

Securing a DA eliminates one of the most significant risks in the development process while also adding value to the project. As a result, equity investors will feel more confident about investing.

New valuations will determine the proportion of the development firm you are willing to give up in exchange for the additional required stock.

If you’ve crunched the statistics and can show a positive return on equity for the project, you should show the investor the return on their money rather than the entire development cost.

Employ a good accountant or lawyer with equity finance property development experience when assessing these values. They can organise the development company’s shareholding and justify it to the equity investor.

Bottom line

Many people can afford to invest in a development project. While it is simple to persuade people to become investment partners, these relationships can become problematic if some basic rules are not followed.

Stick to the following guidelines, and you’ll have fewer problems down the road:

Choose your investors wisely.
Only seek out investors if necessary.
Define your and their roles in the process of development.
Determine how the profits will be distributed early on.
Reduce your investor’s anxiety.
Keep your equity position under control.
Maintain one-at-a-time investment agreements with a single property.

Begin to establish a level of credibility and trust in yourself, and always act professionally. Treat all investors fairly and don’t take equity financing advantage of the connection, or you’ll have a hard time finding partners eager to invest in your future projects.

To make your property development project a success, enrol for one of my Structured Property Development Courses.

FAQs

What is the benefit of equity finance?

Equity finance is the act of providing capital to a company in exchange for shares in that company.

There are a few key benefits of equity finance. First, it allows entrepreneurs to retain control of their businesses. Second, it provides investors with a potential for greater returns than debt finance. And third, it allows companies to raise larger sums of money than they would be able to through debt financing alone.

Which is better, equity or debt financing?

In most cases, taking on debt capital is a better option than giving up equity in your company. You give up some—possibly all—control of your firm when you give away equity. By engaging investors, you’re also complicating future decision-making.

What is equity finance in property development?

Selling a firm’s shares to the public, big investors or financial companies is a way to obtain new capital known as equity finance. In exchange for an equity stake or ownership in the company, they supply much-needed funds to help the company keep operating.