What Comes First in Property Finance, the Debt or the Equity?

March 9, 2023
What Comes First in Property Finance, the Debt or the Equity?

In property finance, both debt and equity can play a role in financing a property development project. Which comes first depends on the specific circumstances of the project and the preferences of the stakeholders involved.

Debt finance typically refers to borrowing money from a lender, such as a bank, building society, or other financial institutions to fund a property development project. It typically involves lower risk for the lender, as they are entitled to repayment of the loan regardless of the success of the project.

Equity finance, on the other hand, refers to investment from private individuals, institutional investors or other sources in exchange for a share of ownership in the property development project and involves higher risk for the investor, as their return is dependent on the success of the project.

In some cases, debt finance may be secured first to provide a foundation for the project, with equity finance being sought later on to provide additional funding as needed. In other cases, equity finance may be secured first, with debt finance being sought later to provide additional funding as the project progresses - essentially as a type of funding top-up.

Ultimately, the decision about which comes first, debt or equity, depends on a variety of factors, including the goals of the project, the level of risk involved, and the preferences of the stakeholders involved. It's common for property development projects to use a combination of debt and equity finance to ensure sufficient funding is available and to manage risk.

The capital stack refers to the various sources of capital used to finance a property development project and consists of debt and equity arranged in order of priority in the event of default or bankruptcy.

Debt typically sits at the bottom of the capital stack, as it is the first to be repaid in the event of default or bankruptcy. Equity sits at the top of the capital stack and is only repaid after the debt has been fully repaid. 

The capital stack is an important consideration when structuring a property development project, as it determines the priority of repayments in the event of default or bankruptcy. By carefully structuring the capital stack, developers can manage risk and ensure that sufficient funds are available to complete the project.

Both debt and equity are important in property investment and development because they provide the necessary capital to acquire and improve properties. The specific mix of debt and equity used in a property investment will depend on a variety of factors, including the investor's financial goals, the type of property, the stage of the investment, and the prevailing market conditions. Investors must carefully consider their risk tolerance, financial capacity, and investment objectives when deciding on the appropriate mix of debt and equity to use in a property investment.

From structuring your capital stack to sourcing the funds required for your project, we can help you build your property portfolio and reach your business goals. 

If you have any questions about funding your next deal, speak to our funding specialists today.

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