Could You Use a benefactor?
Here is an interesting thought. Are strategic benefactors a way forward as opposed to having a pot of money available on a deal by deal basis?
A benefactor (from Latin bene, meaning 'good', and factor, meaning 'maker') is a person who gives some form of help to benefit a person, group or organisation (the beneficiary), often gifting a monetary contribution in the form of an endowment to help a cause.
There are a huge number of people looking to raise money for property proposals and I'm always asked the question; "Do I raise the money first or get a deal first then go for the money?"
Then, there are a number of small developers that have the energy, training and enthusiasm but not yet the money or experience to do some great deals.
I meet them all the time.
Then it struck me.
Could we bring investors to the table as benefactors rather than simple investors?
Here's the thinking. A small number of potential developers may be shackled by working to pay the bills. In their spare time, they work wisely to get development deals to a point where they can be carried through and release a reasonable dividend...but this could be done quicker if they had th comfort of knowing that then bills were paid.
This is not only a time issue, it's a mental issue. The sheer clarity and favourable "head-space" that gets cleared out by knowing that the basics are taken care of is too good to overlook.
So there may be a better return for investors to become benefactors instead of simple lenders.
Here's an example and some basic maths.
Tom has become an accidental landlord. He has two or three rented out properties and now wants to be a full-time property person either as a small developer or landlord but he has a full-time job that he wants to quit, but it pays the bills.
He has paid for property training and might even have a mentor. Through his new found knowledge, he has identified a number of property proposals that can offer a decent return.
One is a small commercial conversion, a shop with 4 flats on top that he needs £750k for but will generate a £150k profit after all development and finance costs.
His options are, raise money through a joint venture partner or from a lender for a specific property proposal. This money might come at a coupon of 6%.
It will take longer to complete as he works full-time and might have to bring in extra paid help to complete the deal. Thereby diminishing his eventual return. So,18 months to generate a possible £150k
Could another way be to partner up with a benefactor?
A benefactor guarantees £5k per month for 12 months to cover Tom's living expenses - £60k
Tom is now free to pursue property deals and focus on getting the conversion over the line.
When the conversion deal completes after 18 months, he repays the benefactor with a 10% coupon and or splits the profit.
The benefactor gets his £60k back plus interest of £6k and a 50/50 split or £42k - or an ROI of 80% annualised at 48%
Could this be a better way to invest?
The advantages are that the benefactor gets a decent return on investment and an opportunity to mentor, give-back, share their knowledge, help.
Downsides will be, risk to the benefactor. The developer does no work! After a a period of time the benefactor pulls out.
What do you think?
Here are some benefactor examples:
https://www.nytimes.com/2009/05/12/education/12college.html
And I read this here: https://www.profounddecisions.co.uk/empire-wiki/Benefactor
"Benefactors are not moneylenders, they do not lend money and charge interest. Instead they invest in people and projects, providing money to help fund something in the hope that all the participants can gain as a result. The Highborn believe that this is a more ethical way for those who have money to employ it, since the benefactor takes the risk alongside the people they choose to invest in."
I think this would be a great idea! I know that this was the exact issue we had on a deal but couldn't move forward on it as we didn't have the 5K per month to cover the costs. I would always welcome a mentorship type relationship with the benefactor as you learn so much from others experience. But without any security to the Angel I'm not sure many would go down this route.
ReplyDeleteNail and Head spring to mind. I know that I would personally benefit from this as would many others. It would give the clarity and head space needed to craft better deals and focus on adding proper value where it is needed and allow people to build up from the ‘smaller’ deals for the newer developers. Investors experience and knowledge could be leveraged throughout the process as a way of minimising their risk and as they work with and mentor the developers they are helping to de-risk throughout the project flight. In my opinion this would achieve greater value for everyone and lead to more and bigger problems being solved.
ReplyDeleteI think that it’s a great idea providing that the people involved are the right people, and that the “heads of terms” are set out and agreed at the outset.
ReplyDeleteGiving somebody the most valuable commodity of “time” is the major hurdle that most people struggle with.
I have since spoken to a solicitor who will draft a suitable agreement. It's a bit more complicated than first thought (surprise!!) Investing in a NewCo with two shareholders, the benefactor and the beneficiary, might be a way to proceed. Beneficiary can issue monthly invoices and draw down amounts equal to a monthly salary replacement. In return, certain agreed KPI's would need to be met.
ReplyDelete