An Equity Guarantee is an ‘equity replacement’ insurance product, that is used by Property Investors, Property Developers and Infrastructure Developers (governments or private companies), to secure ‘own equity’ for property purchases or developments, without using own cash resources.
This enables business to grow at a faster pace than would be normally possible and to achieve a higher Rate of Return on property projects and property investments. These are accepted by South African and other banks around the world.
By way of an example: The bank approves 70% debt funding on a property transaction and requires the client to provide 30% equity. The client only has 10% equity. The balance, being 20%, can be provided to the bank in the form of an Equity Guarantee.
In another scenario, the provider of senior debt provides 70% debt funding on multiple property developments or purchases and the client is required to provide 30% equity, but only has equity for one project. Equity guarantees provide the shortfall in required contribution for all the projects, simultaneously.
Property Purchase Equity Finance: Where a client needs funding for a rental income property investment and is short of the required cash contribution or equity commitment (which most banks set at between 30% and 40%), in order to secure the 60% to 70% senior debt finance, then it is possible to use an Equity Warranty or Deposit Guarantee to replace this required equity finance.
A purchaser has made an Offer to Purchase an investment property, with long term leases in place. The bank will provide 70% debt funding and the buyer needs 30% equity contribution; but he only has 10% equity available. The other 20% can be secured using the Deposit Equity Guarantee solution.
A purchaser wants to buy more than one property and has 30% deposit available.
The property investor should put down 10% equity on each property and use the Deposit Equity Guarantee to provide the other required 20% on each transaction.
Property Developer Insurance Guarantee
Land development funding can be quite difficult to secure as the developer has to provide a large amount of own contribution. Our vendors offer a solution. Property developers can use equity insurance guarantees to:
– reduce risk on a project
– raise more capital
– retain existing capital
– replace own equity
– increase own equity
This is done by providing cover against ‘delivery non-performance’ and by replacing the developers own equity contribution with a financial instrument issued in favour of the bank, which accept these instruments when developers are raising capital.
The Equity Guarantees for Property Developers are provided to the developer / borrower of capital and not to the building contractor. However, the developer and contractor could be the same company. These guarantee the equity contribution.
By using the deposit Equity Guarantee, developers can:
– free up capital (cashflow)
– gear existing capital resources
– take on more than one project or property investment
– reduce costs of raising capital (there is no raising fee to secure an equity guarantee)
– increase Return on Investment and IRR
– better deployment of capital
Own cash can be used on more than one project and in so doing developers Rate of Return on cash contribution is improved because they are using less of their own money, on each project.
Cashflow Flow Retention: A developer has 30% equity and the bank will provide 70% debt funding, but the developer needs his cash to execute the build program
Solution: He places 10% cash equity with the bank and takes out a 20% Deposit Equity Guarantee.
This leaves him with approx 20% of his cash intact to fund his operational cashflow and achieve a better return on his investment.
Multiple Project Rollout: A developer wants to develop 3 mixed use property developments simultaneously, but he only has equity for one development.
Solution: The bank will provide 70% debt finance if there is 30% equity on each project.
If the developer offers 10% cash equity on each development and then takes out a 20% Equity Guarantee on each project, he can undertake the 3 developments at the same time.
Fund Those Massive Projects, With Limited Cash Resources
Infrastructure development funding for dams, roads, hospitals, pipelines, power lines, electrical power plants, sewer systems, technology systems, refineries, mines and others, can be very difficult to secure, as the amounts required can be very large and collateral requirements very high.
Development banks and other lenders are prepared to put up a certain amount of debt funding but want the developers or project implementors to put up some of the development finance, called equity funding. If the company tendering does not have sufficient working capital, it may result in the loss of the tender.
A Secured Equity Guarantee enables developers to secure greater funding from debt financiers and lending institutions, as it provides security for the unfunded portion of a project; and this enables the smaller operator to ‘gear their equity’ to compete against their bigger competitors.
Problem: Increased project rollout is required by a company that has the knowledge and experience to take on larger projects but is limited by the available cash to support the debt funding loan, in a PPP (Private Public Partnership)
Solution: The company can secure Equity Finance by using the Equity Warranty Policy or Equity Guarantee Policy and retain its cash for operational activities.
Achieve a Higher ROI Because of a Lower Equity Contribution
Key Benefits of Equity Guarantees
– Achieve a higher Return on Investment because your equity contribution is lower.
– Lenders can provide increased funding – due to lower risk with a guarantee.
– Utilise existing cash more effectively – retain cash for operational purposes.
– Unlock assets and convert them to cash – use existing assets as equity.
– Undertake more than one project or property purchase – use the equity on more than one project.
– Easier to raise finance as the lender risk is minimized.
– Simplified funding applications.
– Lower cost option – the premium is less than equity funding interest rates.
– Retain your shares – no dilution of your shareholding.
– Limited time period – not locked in forever.
– Increase your ability to secure debt funding even if the equity requirement is high.
– No raising fee – cheaper than raising capital
– No early cancellation penalties
- Company Profile and Portfolio of Evidence.
- Project or Property information
- Project Feasibility or Property Income and Expenses
- Audited Financial Statements
Our vendors will advise what further information they wish to see
Assessment is done and outcome provided to applicant
If approved, a term sheet is offered and if accepted, the guarantee is issued.
The following circumstances could trigger a claim:
Developer: Example : Bankruptcy and proven and valid cost overruns
Contractor: Bankruptcy and breach of contract
Structural Defects: Where there is material impact.
Frequently Asked Questions
Do South African, African and other banks accept this?
Who underwrites this product?
How much does it cost?
The rates are market related. Clients use this financing solution because it is cost effective and works. Rates range from 2,5% pa to 5% pa for property purchases and 5% pa to 8% pa for development finance. This is based only on the equity portion NOT the entire project value.
No raising fees area applicable.
Where is this product available?
How to get funding for property development in South africa?
1. Equity which is the developers own funds that the debt funder requires be lodged to show commitment to the project. This can range from 20% up to 50% and is project and company specific.
2. Debt Finance which is the banks or a loan from the lenders and can range from 50% to 80%
3. By using the equity guarantee solution, developers reduce the amount of own funds needed to finance a project.
The same applies to investors wanting to fund property purchases.
How to get land development funding?
Are there early cancellation penalties?
What are the raising fees?
How do I exit the policy?
What is the minimum and maximum guarantee amount?
What collateral do I need to give?
What is needed for an initial assessment?
- Annual Financial Statements
- Project Feasibility Studies
Is this a type of Mezzanine Finance?
What are Equity Sources of Finance?
What is a deposit guarantee?
Can I get a ‘blanket’ facility
What are premium payments?
Ways to Raise Equity Funding
There are a few ways to secure Equity Financing. These can be broken down into two main categories:
A: Where the business owner retains his current shareholding
B: Where the business owner sells some of the company shares to raise equity
A: Retain Shareholding
Own Assets: Existing assets such as Bond-Free properties can be used to unlock capital.
Mezzanine Funding: Is a combination of debt and equity funding and tends to be a short-term or bridging facility. Mezzanine funders tend to take on higher risk projects and expect a higher return on their risk capital.
Equity Guarantee: The business owner purchases an insurance product, which enables the company to source equity capital using the strength of the company balance sheet
Share Offering: Offering shares in the company to investors enables company owners tovraise capital. Shares can be offered to private investors or through a formal IPO (Initial Public Offering) this needs to be undertaken by a professional organisation.
Venture Capital: Venture Capitalists will invest in companies that they believe have potential to succeed. These investors will become your equity partners and so shares may need to be given to them, to secure the finance.
Crowd Funding: This has become a popular way to find smaller start up projects. The entrepreneur sells shares in the company to raise capital.