When you're looking to add a money investor or joint venture partner to your deal, someone will inevitably tell you to make sure you've prepared your IM - short for Information Memorandum.
Essentially, this is a document that compiles all the details of your deal, and outlines exactly what you need from the investor. But did you know that lenders will sometimes want to see your IM for the project?
Which raises the question - should you give the lender the same IM as you give your investors?
I'm only going to cover some elements of what goes into an IM to highlight different horses for different courses. I'm not going to go into the nuts and bolts of what you should put in an IM, so if that's something you're interested in, check out my Sunday Session on YouTube where I cover that in detail.
Another factor you need to consider is the type of investor you're looking for - equity investor (getting a share of the profits) or a private lender (getting an interest rate return on their cash). Getting confused yet?
Returns
One very obvious element in any Information Memorandum is what level of return the project is going to make. Your feasibility is going to be the same, no matter who you're giving the IM to, but how you express the profits should vary.
When approaching an equity investor, it's good to focus on the cash-on-cash return. So if the investor puts in $100k, they'll get $150k back at the end of the project. That's a 50% cash-on-cash return, based on the anticipated profit.
A private lender, however, is purely getting an interest rate return, so that's what you would focus on.
And for a standard lender, they're interested in the return on investment (ROI) which is usually calculated as profit-on-cost. So if the whole project cost $800k and made a profit of $200k, that's a 25% ROI.
Having said that, the ROI should still be in any type of Information Memorandum, as it's the gold standard way of expressing how profitable a project is going to be. It makes it easier for an investor to compare different projects if they're all using the same criteria.
Language
The other big difference between an IM for an investor and one for a lender is the language you use around the deal. And I'm not talking swear words, either!
When you're talking to investors, they understand profit. That's the language they use. For lenders, they're going to talk about return on equity. So it's worth going through your IM and making sure you tweak this little difference to suit your audience.
Another difference, although it may not come up in your IM, is investors use words such as "loan" and phrases like "loan to value ratio (LVR)". Lenders will use "debt" and "debt to equity ratio".
While these differences in language may seem minor, the important thing here is to make it clear you understand what you're talking about. This is particularly relevant when approaching lenders. When you use their language, it gives them confidence that you're experienced in the area of development. It all helps!
For Lenders
As an extra tweak, your Information Memorandum for a lender shouldn't include any information about investors. Some lenders might be okay with knowing your equity is being funded by someone other than you, but plenty are not so keen.
"No Money Down" developers with no "skin in the game" are seen as far too risky, even if they're often the most savvy of them all if they've put together that type of deal!
Outside of those differences, the remaining elements of your IM such as demographics in the area, area history and more will still be the same for any audience.
Other Uses For Your IM
Now that you've gone to the trouble of putting together your Information Memorandum, have you thought about giving one to your Valuer?
When you think about it, it makes a lot of sense. The Valuer needs to understand that this site has potential for more, and they can also use the comparables listed in the IM to help them form an opinion on the value of the property.
It can also be used as the basis for your marketing campaign. This is very much the case if you're selling some or all of your project off the plan. Imagine being a buyer, and you receive a detailed document that shows you all the reasons why you should buy the property. Bonus!
Again, you'd need to go through the IM and take out the investor content and feasibility numbers, but there's plenty of other good information in there.
Even if the buyer is buying their forever home, not an investment property, the more evidence you can give them that a site or dwelling in your development will hold its value and even better, gain value over time, might help sway them in your favour.
You've done the work, so use it to your advantage! Just make sure each IM you hand out is tailor made to suit its audience, so you get the maximum benefit.
Essentially, this is a document that compiles all the details of your deal, and outlines exactly what you need from the investor. But did you know that lenders will sometimes want to see your IM for the project?
Which raises the question - should you give the lender the same IM as you give your investors?
I'm only going to cover some elements of what goes into an IM to highlight different horses for different courses. I'm not going to go into the nuts and bolts of what you should put in an IM, so if that's something you're interested in, check out my Sunday Session on YouTube where I cover that in detail.
Another factor you need to consider is the type of investor you're looking for - equity investor (getting a share of the profits) or a private lender (getting an interest rate return on their cash). Getting confused yet?
Returns
One very obvious element in any Information Memorandum is what level of return the project is going to make. Your feasibility is going to be the same, no matter who you're giving the IM to, but how you express the profits should vary.
When approaching an equity investor, it's good to focus on the cash-on-cash return. So if the investor puts in $100k, they'll get $150k back at the end of the project. That's a 50% cash-on-cash return, based on the anticipated profit.
A private lender, however, is purely getting an interest rate return, so that's what you would focus on.
And for a standard lender, they're interested in the return on investment (ROI) which is usually calculated as profit-on-cost. So if the whole project cost $800k and made a profit of $200k, that's a 25% ROI.
Having said that, the ROI should still be in any type of Information Memorandum, as it's the gold standard way of expressing how profitable a project is going to be. It makes it easier for an investor to compare different projects if they're all using the same criteria.
Language
The other big difference between an IM for an investor and one for a lender is the language you use around the deal. And I'm not talking swear words, either!
When you're talking to investors, they understand profit. That's the language they use. For lenders, they're going to talk about return on equity. So it's worth going through your IM and making sure you tweak this little difference to suit your audience.
Another difference, although it may not come up in your IM, is investors use words such as "loan" and phrases like "loan to value ratio (LVR)". Lenders will use "debt" and "debt to equity ratio".
While these differences in language may seem minor, the important thing here is to make it clear you understand what you're talking about. This is particularly relevant when approaching lenders. When you use their language, it gives them confidence that you're experienced in the area of development. It all helps!
For Lenders
As an extra tweak, your Information Memorandum for a lender shouldn't include any information about investors. Some lenders might be okay with knowing your equity is being funded by someone other than you, but plenty are not so keen.
"No Money Down" developers with no "skin in the game" are seen as far too risky, even if they're often the most savvy of them all if they've put together that type of deal!
Outside of those differences, the remaining elements of your IM such as demographics in the area, area history and more will still be the same for any audience.
Other Uses For Your IM
Now that you've gone to the trouble of putting together your Information Memorandum, have you thought about giving one to your Valuer?
When you think about it, it makes a lot of sense. The Valuer needs to understand that this site has potential for more, and they can also use the comparables listed in the IM to help them form an opinion on the value of the property.
It can also be used as the basis for your marketing campaign. This is very much the case if you're selling some or all of your project off the plan. Imagine being a buyer, and you receive a detailed document that shows you all the reasons why you should buy the property. Bonus!
Again, you'd need to go through the IM and take out the investor content and feasibility numbers, but there's plenty of other good information in there.
Even if the buyer is buying their forever home, not an investment property, the more evidence you can give them that a site or dwelling in your development will hold its value and even better, gain value over time, might help sway them in your favour.
You've done the work, so use it to your advantage! Just make sure each IM you hand out is tailor made to suit its audience, so you get the maximum benefit.
