In recent years, and following the financial crash in 2008, banks have become increasingly cautious with lending to property developers. Many developers are, therefore, finding banks rejecting loan applications, or offering funding for a much smaller proportion of the cost of development. As a result, developers are having to look for alternative sources of finance.
One option is seeking funding from private investors; however, this comes at a cost, with interest rates on borrowings significantly higher than typical bank borrowings. Interest rates of between 12% and 15% are not uncommon on such loans.
Rather than a traditional loan therefore, it may be worth considering alternative ways to structure the financing to reduce the cost for the developer, whilst maintaining the net income (i.e. after tax) for the investor.
There are a number of ways that this could be achieved, with the main premise of converting income into capital in the hands of the lender. With lower capital gains tax rates, the investor could receive the same net income as under a traditional financing route but at a lower cost to the developer. As an example, a net saving of up to £15,000 could be achieved by a property developer, based on a finance cost of £100,000, by structuring as capital rather than income. For further details on the options available to structure the financing of your property developments, please get in touch with Nick Haines on 01242 237661 or email firstname.lastname@example.org.