A good development finance broker is invaluable. Brokers can save you time and effort by sourcing finance for your property development project. This frees you up to concentrate on what you do best: building houses.
But a good broker can be hard to find. As with development finance lenders, there are lots of brokers out there and quality varies greatly in this crowded market. Getting good terms on your finance will depend on you choosing the right one.
To help you make the right decision, here are 5 things to look for in a development finance broker.
1. A detailed financial model
Lenders want to know your project is financially viable before they’ll lend to you. You might have a good idea of headline figures (such as acquisition costs, build costs, and Gross Development Value (GDV), but lenders will want to see that your project remains profitable once all costs have been considered.
A good broker should assess your project’s viability by using a detailed financial model. As well as acquisition and build costs, this model should take into account development and professional fees (for architects, engineers, s106/CIL, building regulations and warranties), sales and marketing costs, and a contingency should things not go to plan.
Once these costs have been calculated, your broker should deduct them from your project’s GDV to arrive at your pre-finance profit. Most lenders require this profit to be at least equal to 22% of GDV. If your broker’s model shows this to be the case, then your project is financially viable.
2. Knowledge of the development finance market
As sites like the Bridging Loan Directory show, there are lots of development finance lenders to choose from. How do you know which lender’s terms are best for you?
A good broker will know who to approach on your behalf.
Early on, your broker should sit down with you to learn about your resources and business goals. They might ask how much cash you have available to put into projects or about your growth strategy. For example, do you want to put all your cash into one project and maximise your profit or spread your cash over multiple projects to take advantage of more land opportunities?
Having done this, your broker should approach lenders who will help you achieve your goals.
If you have some cash and your goal is to maximise profit from a single development, your broker should find you a lender offering low leverage with a low interest rate, to reduce your finance costs.
However, if you don’t have much cash or your goal is to acquire and build out as many sites as possible, your broker should find a lender offering high leverage, to reduce your cash commitment on each project (unfortunately, this will also mean a higher interest rate).
3. Ability to persuade lenders to ‘take a view’
All lenders have lending criteria that dictate what they’ll lend for and who they’ll lend to. But development projects don’t always fulfil these criteria neatly. Sometimes it’s necessary to get lenders to ‘take a view’ (or make an exception) if your project is going to be funded. A good broker should be able to do this.
For example, a lender might ordinarily require a developer to cover 10% of project costs with their own cash. In the industry, this is known as ‘skin in the game’: a way of getting developers to commit, so they don’t walk away from projects if things get difficult.
If you’re not able to cover 10% of costs, your broker should be able to craft a compelling narrative about why this is the case.
For example, they might persuade the lender that you’re very ambitious and the reason you don’t have enough cash is that your strategy is to acquire multiple sites at once. The lender could then take a view on your project, in anticipation of you continuing to bring them profitable projects in the future.
Remember: you want to build and lenders want to lend to help you do that! Sometimes, all that’s needed is a good broker to help lenders see the potential in a project or a developer.
4. Equity contacts
The most any lender will lend for a development project is 80-90% of costs. This means you need to cover the shortfall: usually, 10-20% of costs. The most obvious way of doing this is to use your own cash. But if you don’t have enough cash or want to minimise what you put into the project, you need to find an equity investor.
Equity investors come in different shapes and sizes. Some are High Net Worth Individuals, investing their personal wealth in property. Others are Family Offices, doing the same with the money of wealthy families. Then there are property funds, which having funding lines from large institutions.
However, equity is hard to find on your own. Unlike banks and lenders, equity investors don’t tend to advertise their services widely. Rather, they rely on their relationships with brokers, who bring them profitable projects to invest in.
When you approach brokers to discuss finance, ask them about their equity contacts. A good broker should have a network of investors to draw on, to get your project funded.
5. A pro-active approach
Finally, it’s important that your broker remains pro-active after securing offers of finance. Land transactions are rarely straightforward and you can come up against lots of unforeseen challenges, including down-valuations and delays from solicitors. The last thing you want is to have to deal with these issues alone when you have more important things to think about, like liaising with contractors and preparing to start your build.
A good broker will drive a deal forward by acting as an intermediary between you and your lender/investors and finding creative ways of dealing with challenges. A deal is never done until it completes and you draw down your first tranche of money. Your broker shouldn’t rest until that moment!
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