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Senior debt is normally the first part of debt in the capital stack and typically ranges up to 65% loan to GDV or 80% of loan to overall cost. A senior debt facility will also normally be the cheapest part of the capital stack.
Essentially senior debt is used to fund the acquisition and build of development projects. This is a borrowing vehicle that allows developers to leverage against the potential final value of the project and borrow the money on a drawdown facility. Even if you have enough cash, an experienced developer will be able to then use their cash on multiple projects which can increase return on cash invested dramatically.
Purchase price of land – £1,000,000
Total Build cost including fees – £2,000,000
Total project cost – £3,000,000
GDV – £4,000,000
Total cash contribution – £3,000,0000
Profit – £1,000,000
Total return on cash invested – 33%
Essentially you have used £3,000,000 to generate £1,000,000
Now the example with using 20% cash contribution of total costs
Purchase price of land – £1,000,000
Total Build cost including fees – £2,000,000
Total project cost – £3,000,000
GDV – £4,000,000
Total cash contribution – £600,000
Borrowed amount – £2,400,000
Assumed cost of finance for illustration 10% – £240,000
Total Project cost including finance costs – £3,240,000
Profit – £760,000
Total return on cash invested – 126%
Essentially you have generated £760,000 profit from investing £600,000. This leaves you with another £2,400,000 in your pocket to take on other projects. If you make the same return on the other projects your £3,000,000 becomes £6,780,000
Each deal is individually priced given the risk of the development. Typically they range from 4.5% a year up to 10% a year. It is extremely important to consider the total cost of facilities. Lenders are quite clever in how they compound their interest and their fees. Sometimes a better interest rate per annum doesn’t always materialise the cheapest overall senior debt facility.
As with most financial products in the lending market, senior debt facilities are extremely complex. Banks take advantage of this and will always pitch as high as they can in terms of fees and pricing structures. Having a good adviser on your side through this negotiation can be hugely beneficial and will make sure you are getting the correctly structured facility for your business.
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