The main difference between debt and equity and how these fit within the the financing structure of property development deals.
You need to have a brief overview of FCA Policy Statement PS13/3 and the implications it has for you as property developers with deals that you are potentially going to want to raise finance for.
It really comes down to the fact that the onus is on you to determine that your investors are either 'high net worth' (HNW) or 'sophisticated investors' (SI) BEFORE you begin promoting your deals to them.
There is a criterion for each of these given by the FCA. Something to be aware of here is that if at any point in the future, the investor fails to meet the criteria for HNW or Sophisticated investor status, you have the obligation to extract them from any deals you are working on with them.
This is very important for you.
As an example, to qualify as HNW (In the UK in 2017) they would need to have an annual income of over £100K or net assets of over £250K (excluding their own home). If they are HNW based on their income and they invest with you, but then they lose their job, they are no longer HNW.
The onus is on you to keep up to date with their status and also to extract them from any investment deals they are a part of with you, if they fail to meet the criteria.
There is one way around having to worry about FCA 13/3, which is the use of Angel or crowd funding sites to fund your deals. In fact this is explicitly outlined in the FCA policy statement 14/4.
So with all of that covered, you need to consider the JV Risk Analysis Checklist. This is a one page document that would be completed for each person that you are working with on a given project, such as business partners, investors, developers etc... It links how you have evaluated this person to your own personal risk profile to give some guidance as to if this is someone that you should be working with. It then leads on to ways to mitigate this risk by way of further checks or more robust agreements in place, for example. This relatively simple one page document will change the way you think about and evaluate potential JV partners.
So by now you should know your obligations according FCA 13/3, you will have done your due diligence on our potential JV partner and will have done our risk assessment on this person.
So now you need a JV agreement, but where to begin?
You often see people on forums asking the question: "Does anyone have a JV Agreement template?"
The fact is that there is no such thing as people and projects vary widely, so all JVs start with a blank sheet of paper. I think when people ask that question, though, what they are really feeling is: "I have no idea where to even begin with this and I am worried that if I do not do it right I may end up getting screwed, so I would rather just have a template to work from, to reduce the worry."
That is exactly how I have felt when looking for templates in the past. In fact, what you really need is some step by step process for building your own bespoke JV agreements specific to each person and project.
This is why you need to look at a JV Agreement Checklist.
This is a relatively simple A4 sheet (albeit with small print) of questions that cover all aspects of the team, the project and structure.
It is a mixture of multi-choice questions and some where you add in specific information. The point is that this completed document can then be presented to a lawyer who will be able to write your JV agreement.
As well as being a tool to aid with creating JV agreements, it is very useful as it forces you to think about all aspects of the agreement that you are entering into and more importantly ensures that these have all been discussed with your potential JV Partner.
There are too many to list here, but a couple of examples would be:
1. Who has legal control of the SPV?
2. How will funds be distributed from the company and will this be the most tax efficient manner for all parties?
3. What are the exit strategies assuming all goes to plan and crucially if all does not go to plan? Again, this simple document will change the way I approach creating JV agreements.
Another way to raise investment finance would be via crowd funding.
Their are a number of crowd funding platforms for property, such as AngelDen SimpleEquity, HouseCrowd and SimpleBacking.
There are four different types of crowd funding platforms, two of which are unregulated and the other two regulated.
The two unregulated types are 'Fund raising platforms' where you can make donations. An example of this would be the site Just Giving. The other type is 'Rewards platforms', sometimes referred to as 'pre-selling'. An example of this would be Kickstarter.
The two regulated types are 'Peer to peer lending' and 'Equity crowd funding'. Peer to peer lending is where you are offering a fixed rate of return over a fixed period (There are nuances to that definition so take care).
Peer-to-peer is more like a loan agreement that would cover the 'Debt' part of the financing layer cake in the attached slide.
An example of a Peer to peer lending platform would be SimpleBacking. The 'Equity crowd funding', in general, would be offering a piece of the equity although there may be fixed rate equity examples, but will keep it simple for the purposes of this. An example of such a platform would be SimpleEquity.
One of the primary reasons to go down this route is that if raising funds through a platform such as this, you do not have to concern yourself with all of the FCA13/3 compliance issues because the crowd funding platform deals with all of the FCA compliance issue.
If you are presenting deals to potential investors or you are thinking about working with other people in some capacity on any of your projects, you have to ensure that you are doing it safely and legally.
Remember that the onus is on you to make sure that your investor is either a High Net Worth or a Sophisticated Investor. There is no way around this unless you go direct to an Angel Investment office or apply through one of the Crowdfunding platforms.
No comments:
Post a Comment