12 March 2021

Crowdlending, how it works & selection process

By Sami Baruh

In 2021, Foxstone is inaugurating a new business model that complements the co-ownership model: crowdlending. Foxstone members now have the opportunity to participate financially in real estate development projects in Switzerland that are not accessible to the general public.

Crowdlending consists of investors lending funds to a development company for the purpose of real estate development.

The interest rate is fixed before the loan is granted and the interest is paid on a recurring basis or at the same time as the capital repayment at the end of the loan, the duration of which varies from 12 to 36 months depending on the promoter’s needs. The investment is made in tranches of CHF 10’000.

The investors do not replace the bank but complement the promoter’s equity in the form of a subordinated loan.

How it works

In concrete terms, a crowdlending operation takes place in four stages:

  1. Foxstone enters into a loan agreement with the real estate development company, which is a company under Swiss law (SPV) that only owns the development project which is the subject of the loan.

An SPV (Special Purpose Vehicle) is a subsidiary created by a parent company to isolate financial risk. Its legal status as a separate company allows it to guarantee its obligations even if the parent company goes bankrupt. The SPV is established and exists only to carry out a specific project.

  1. Investors subscribe to bonds issued by Foxstone through the platform.
  2. They receive periodic interest payments net of fees during the term of the loan or at maturity.
  3. At the end of the loan term, the development company repays the principal and interest to Foxstone, which in turn pays the investors.

A rigorous selection process

Foxstone applies the same rigour to the selection of real estate development projects as it does to the selection of buildings. Each project undergoes a rigorous, multi-step review before being offered on the platform:

An initial screening is performed to ensure that the project meets Foxstone’s selection criteria:

  • The quality of the location, which must present a strong demand for housing and therefore benefit from sustained demographic growth, be close to the major regional employment centers, be well served by public transportation as well as by the road network and enjoy all the modern infrastructures,
  • The project must have a valid building permit or the purchase of the land must be conditional on obtaining a building permit,
  • The developer and general contractor in charge of the construction must have a proven track record in real estate development and a solid reputation,
  • The developer must invest equity in the project.

If the project meets the selection criteria, it undergoes an in-depth analysis to ensure its viability. This analysis includes:

  • An analysis of the financial plan of the operation (equity, bank loan, pre-sales) and the payment plan of the general contractor. The general contractor is responsible for soliciting bids, selecting craftsmen, planning the construction project, coordinating and directing the work and controlling costs;
  • An analysis of the marketing plan and the sales prices of the lots to ensure that they are in line with market prices,
  • A study of real estate development projects undertaken in the area over the past five years to ensure that the project will not create a surplus of housing in the area and that lots will find buyers.

If the project is selected after the in-depth analysis, it undergoes a due diligence audit, which consists of a financial and legal review: Foxstone examines the financial ratios of the developer and the company owning the project, and its legal partners review all contracts related to the project.

Once project financing has been approved, Foxstone structures the loan with the necessary security to protect investors. At least one of the following three safeguards is put in place:

  • Second mortgage note registered in the land register. A mortgage note is a debt secured by real property;
  • Pledging of the shares of the company carrying the project,
  • Retention of a portion of the transaction’s margin by the bank to repay the first and second lien loans.

The participatory loan allows individuals to participate financially in quality real estate development projects in Switzerland from CHF 10,000 and to receive a fixed return in Swiss francs. We will see in a future article that this model has many advantages, both for investors and developers.

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