Securing finance for your property development projects can be a drawn-out and painful process if you are lacking in experience or don’t understand the ins and outs of the development finance game. We all know the great need for new homes to be built every year in the UK, but one of the major factors standing in the way of property developers is getting access to the funding they need. To add to the frustration of this situation is that there are a whole host of lenders out there, eager to complete loans and put their money to work. So why is this process so difficult?
All the major lenders of development finance receive countless enquiries every day. Sifting through the many unworkable projects to find the few worth pursuing takes up much of their time. If you are able to make your application stand out from the crowd, you put yourself in a better position of commanding the full attention of the lender, giving your application a greater chance of getting to completion.
This guide will give you the inside scoop on how to impress the lender from the very start of your application.
1. Know Your Lender’s Requirements
First things first, you must understand that no two lenders are the same. There is no point taking your project in need of a £1M development finance loan to a lender with minimum loan size of £5m. There’s no point in taking your heavy refurb project to a lender who only lends on ground up residential projects. There’s no point asking for a loan of 65% LTGDV from a lender with a maximum leverage of 55% LTGDV.
Here are a few areas to consider when finding the right lender to approach:
· Scheme type – flats, houses, help-to-buy, prime assets.
· Scheme size
· Location
· Level of gearing needed.
· Experience – if you are a first time developer, you need to know the lenders who will work with first time developers.
· Equity – each lender will have a different requirement of equity from their developers. This can range from 5-30% of total project costs. (note – in limited circumstances, transactions for experienced developers can be structured with zero equity input).
· Personal Guarantees – all lenders will require some level of personal guarantee from developers, but the amount needed will differ from lender to lender.
Do your research so that you aren’t wasting your time or the time of the lender.
2. Show Them The Numbers
The first priority of any lender is to lend on profitable schemes. It is your job to show the lender that you have a detailed understanding of the numbers involved in your project and the best way to do that is to provide them with a financial appraisal.
Your financial appraisal should include the following:
· Land costs, including purchase price, SDLT and any accompanying fees
· Build costs showing cost/sqft and a contingency (at least 5%, ideally 10%)
· Professional fees
· Projected sales prices of the individual units, including price/sqft
· Total project GDV
· Cashflow (optional but it will certainly impress the lender if you can show them when their exit will likely occur)
· Pre-finance Profit to GDV calculated – this needs to show a minimum of 20% for most lenders to consider it viable.
3. Give Them Everything They Need
Development finance loan applications are complicated and lenders will need a lot of information in order to get schemes sanctioned by their credit committees. It can be frustrating when the information is provided in dribs and drabs, through multiple email chains over several days and then it’s realised at credit that the scheme isn’t viable due to something that could’ve been highlighted at a much earlier stage. If you can provide a full pack of information from your very first email, you will find yourself firmly in your lender’s good-books. The following is a solid start:
Developer Background
· A brief narrative company history;
· CV’s on Key Directors;
· Summary details of previous projects;
· A+L statements
· Brochures / sales materials from previous projects.
Information on the Project to be Funded
· A brief narrative description of the project;
· A detailed financial appraisal – (projects must show a profit of at least 20% on cost and preferably 20% on GDV to be fundable);
· A project cashflow forecast;
· A sales report/sales comparables from local agents (at least two);
· A copy of the planning consent;
· A copy of the site plan;
· Detailed drawings / plans / images for the scheme;
· Details of the professional team involved (architects, engineers, planning consultants, building contractor, lawyers etc).
If you can provide all of the above from your first contact with a lender, you will be giving yourself the best chance of getting your project funded.
4. Pre-empt Their Concerns
Unless you’ve found that magical unicorn of the perfect project, and even if you’ve provided the lender with all the information set out above, you will find that lenders will always have concerns that need to be addressed. As already mentioned, these are large and complicated processes we are dealing with and in order to give comfort to the credit committees, it’s worth taking some time to consider any potential barriers from their point of view. Should you identify these potential barriers, the obvious next step is to find ways to overcome them (do not simply hope that the lender won’t notice – transparency is key).
Here are a few examples to consider:
· Do you have the right level of experience to undertake this project? Most lenders will want to see that you have completed a couple of similar sized schemes and if you haven’t then you need to find a way to convince the lender that you are capable of doing so (within reason of course – jumping from a heavy refurb of a flat to building 30 houses isn’t going to work). One way to do this is to ensure you have put in place a top quality professional team and, for example, a fixed-price JCT contract with a highly experienced builder who has completed schemes of this size on time and on budget. Provide their CV and a link to their website to the lender from the start of the process.
· Are your build costs a little light? If you are confident you can build at the proposed costs, show them where your confidence comes from. Give a full break down of build costs straight away, before they ask for it. Give evidence of previously completed projects justifying those build costs.
· Can you justify the sales prices of the units? Have you provided enough comparable sales information? If you’ve had the schemes priced by two local agents and there is a discrepancy between the values, go and get more pricings. The lender wants to see that you know the area like the back of your hand and have put in the effort to understand the local market before you have attempted to secure development finance.
· Do you have any adverse events in your financial history? Explain what happened and what you did to overcome the event.
Lenders want to lend and can be creative and flexible in overcoming any potential barriers. If you are able to help them in this process by being transparent and proactive, you make everyone’s lives much easier.
So there you have it, a quick guide to impressing your lender. Of course, there are always complications in these deals that are not easily foreseen and are out of your control, but putting the effort in early to demonstrate your professionalism and acumen to lenders will give you the best chance of securing finance for your next development project. And, even better than that, will provide a solid foundation for building working relationships with lenders that will be fruitful for years to come.