Preferential Equity vs Joint Venture Funding

Preferential Equity vs Joint Venture Funding

Background

  • Visie Properties were seeking a Joint Venture on their 31 apartment project in Lutwyche Qld, with a view to efficiently spread their capital across their pipeline of projects in high-demand areas of Brisbane, maximising their activity in the current strong market.
  • The ‘Zephyr’ project is located in one of Brisbane’s designated high-growth inner-north areas, with an affordable price-point, on a quiet street yet walking distance to a range of amenities including the new Busway Station and Shopping Centre. These factors make it an attractive project to not only buyers, but also to any potential Joint Venture partners.
Property development by visie properties Zephyr project balcony

Property development by Visie Properties “Zephyr” Project – Balcony View

Scope

  • Development Finance Partners (DFP) was engaged by Visie to provide a JV funding solution to meet the client’s requirements.
  • Upon assessing the merits of the project and the developer, DFP recommended to Visie that giving away up to half of the project profits to a JV partner may not be the most efficient solution for them.
  • A Preferential Equity solution was proposed, which would see Visie’s Return on Equity being significantly greater than under a JV arrangement, whilst ensuring that Visie retains full control of their project.

Property development by visie properties Zephyr project kitchen

Results

  • Development Finance Partners quickly secured an offer for Preferential Equity in conjunction with Major Bank Senior Debt, which Visie accepted. The Pref Equity investor did not require any further pre-sales than the Bank’s hurdle.
  • Compared to a JV agreement, using DFP’s Pref Equity, Visie’s share of profit is forecast to be 56% greater, whilst their RoE is forecast to be significantly improved from 91% to 160%.
  • Zephyr is currently completing pre-sales with construction due to commence in May.

What the client says:

“If you’re prepared to fund a lot of the extra expenses to get yourself to that point it’s sensational, because you get a lot more profit at the back end”.
“It’s definitely something we’d consider again”.
Warren Swanston, Visie Properties

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