A full range of investments now available - how do you choose?
Our current product range and how they differ
Recognising that investing is a very personal thing, driven by your individual financial goals, and directed by your knowledge, experience and appetite for risk, it is our aim to ensure that, within the realms of development funding we provide something for everyone. So, here's a short explanation of the four types of investment currently available:
1st Charge Debt
1st Charge Debt, or Senior Debt as it is sometimes referred to, is mainly used as Bridging Finance or Development Finance. As the name suggests, it is an investment secured against the property asset and is usually limited to a proportion of the value of the property. This is known as the Loan-to-Value.
Usually 1st Charge Debt is kept at or below 75% of the value when the project starts or 65% of the Gross Development Value (GDV). The 1st Charge means that this debt is paid back first and is therefore the lowest risk. As such the rates offered to investors will be lower than for our other three products. Usually, as the LTV gets higher, so does the interest rate, though there are many other factors that influence the rate of return offered.
Many people see 1st Charge Debt investments as ideal IFISA investments because of the lower risk and the fact that the returns are tax free makes up for the slightly lower returns available. These are typically between 9% p.a. and 12% p.a.*
2nd Charge Debt
As the name implies, this is also secured debt, but it is junior to another loan, meaning that it can be paid back only after the senior debt has been repaid in full. Sometimes referred to as Mezzanine Debt this is an extra layer of debt that sits between the Senior Debt and any equity.
Loan-to-values are usually between 70% and 85% and because it can be considered that the risks increase as the LTV increases, the rates on offer can be significantly higher than the senior debt within the same development, typically between 12% and 17% p.a.*
Our 2nd charge loans are IFISA qualifying and as such can generate a healthy tax free return, but given the higher risks most people would decide to allocate just a proportion of their IFISA investments to these products.
CrowdLords developed Interim Equity to provide a more predictable return for Investors who were not familiar with making equity investments and who would be more comfortable with a fixed term and a fixed return.
Unlike our Full Equity investments, Interim Equity uses Redeemable Shares with a fixed Redemption Date and a Fixed Redemption Price and we use it to fill the gap between the Debt and the Developer's Equity. Usually our equity is used to fill the gap between the 2nd Charge Mezzanine at 85% LTV up to 95% or more of the total costs.
Interim Equity is mainly used when the Developer has a range of options to exit the project or where the potential to repay investors early is a benefit. You must remember however that, these shares can sometimes not be Redeemed until any Senior or Junior loans are repaid, unless the lenders have agreed to it in advance.
Interim Equity is not available within an IFISA wrapper and so returns are taxed as usual, so where possible we look to pay the returns in a way that is accounted for as a Capita Gain. Typical returns are between 14% p.a. and 22% p.a.
This is the standard Equity investment where, in return for their investment, investors receive shares in the SPV carrying out the development and in return they have the right to a proportion of the Net Profits after Tax. The proportion is fixed and therefore the amount paid will depend on the final Net profits generated by the development.
The attraction of Full Equity is that, if the development does well and makes more profit, then investors get a higher annualised return. This could be because it was completed early, or the costs were less than expected or the units might sell for a higher price than allowed for at the outset.
It must be remembered though that, with Full Equity, the opposite is also true. If profits are less than projected then the returns are also less. To mitigate some of this risks we agree a Preferred Minimum Return, usually expressed as an annualised figure, which Crowd Investors receive before the Developer is allowed to take any profits. However, this can only be paid if the development generates sufficient profits, it can not be paid out of the original developer's capital.
So, when you have a choice of different types of investment, we suggest you narrow down your decisions by considering the following factors:
- Term: How long can do I want to tie up these funds for and is a fixed term an important factor.
- Income or Growth: Does my tax situation mean that it's better for the return to be accepted for as Income or as a capital gain?
- Tax Free: Do I have any of my IFISA allowance left this year and do I want to use it on this investment?
- Fixed or Variable: Is it important to me to know what the returns are likely to be*?
- Risk & Return: How do I feel about Risk and do I want to accept a lower return in exchange for lower risks?
Quick Reference Table
Note: *Returns not guaranteed.
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