Securing finance for your property development projects can be a drawn-out and painful process if you are lacking in experience or don\u2019t 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?<\/p>\n
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.<\/p>\n
This guide will give you the inside scoop on how to impress the lender from the very start of your application.<\/p>\n
First things first, you must understand that no two lenders are the same. There is no point taking your project in need of a \u00a31M development finance loan to a lender with\u00a0minimum loan size of \u00a35m. There\u2019s no point in taking your heavy refurb project to a lender who only lends on ground up residential projects. There\u2019s no point asking for a loan of 65% LTGDV from a lender with a maximum leverage of 55% LTGDV.<\/p>\n
Here are a few areas to consider when finding the right lender to approach:<\/p>\n
\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Scheme type \u2013 flats, houses, help-to-buy, prime assets.<\/p>\n
\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Scheme size<\/p>\n
\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Location<\/p>\n
\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Level of gearing needed.<\/p>\n
\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Experience \u2013 if you are a first time developer, you need to know the lenders who will work with first time developers.<\/p>\n
\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Equity \u2013 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).<\/p>\n
\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Personal Guarantees \u2013 all lenders will require some level of personal guarantee from developers, but the amount needed will differ from lender to lender.<\/p>\n
Do your research so that you aren\u2019t wasting your time or the time of the lender.<\/p>\n
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.<\/p>\n
Your financial appraisal should include the following:<\/p>\n
\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Land costs, including purchase price, SDLT and any accompanying fees<\/p>\n
\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Build costs showing cost\/sqft and a contingency (at least 5%, ideally 10%)<\/p>\n
\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Professional fees<\/p>\n
\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Projected sales prices of the individual units, including price\/sqft<\/p>\n
\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Total project GDV<\/p>\n
\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Cashflow (optional but it will certainly impress the lender if you can show them when their exit will likely occur)<\/p>\n
\u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Pre-finance Profit to GDV calculated \u2013 this needs to show a minimum of 20% for most lenders to consider it viable.<\/p>\n
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\u2019s realised at credit that the scheme isn\u2019t viable due to something that could\u2019ve 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\u2019s good-books. The following is a solid start:<\/p>\n
Developer Background<\/strong><\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0A brief narrative company history;<\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0CV\u2019s on Key Directors;<\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Summary details of previous projects;<\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0A+L statements<\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Brochures \/ sales materials from previous projects.<\/p>\n Information on the Project to be Funded<\/strong><\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0A brief narrative description of the project;<\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0A detailed financial appraisal \u2013 (projects must show a profit of at least 20% on cost and preferably 20% on GDV to be fundable);<\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0A project cashflow forecast;<\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0A sales report\/sales comparables from local agents (at least two);<\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0A copy of the planning consent;<\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0A copy of the site plan;<\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Detailed drawings \/ plans \/ images for the scheme;<\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Details of the professional team involved (architects, engineers, planning consultants, building contractor, lawyers etc).<\/p>\n 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.<\/p>\n Unless you\u2019ve found that magical unicorn of the perfect project, and even if you\u2019ve 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\u2019s 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\u2019t notice \u2013 transparency is key).<\/p>\n Here are a few examples to consider:<\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Do 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\u2019t then you need to find a way to convince the lender that you are capable of doing so (within reason of course \u2013 jumping from a heavy refurb of a flat to building 30 houses isn\u2019t 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.<\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Are 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.<\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Can you justify the sales prices of the units? Have you provided enough comparable sales information? If you\u2019ve 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\u00a0before<\/em>\u00a0you have attempted to secure development finance.<\/p>\n \u00b7\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0Do you have any adverse events in your financial history? Explain what happened and what you did to overcome the event.<\/p>\n 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\u2019s lives much easier.<\/p>\n 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.<\/p>\n","protected":false},"excerpt":{"rendered":" Securing finance for your property development projects can be a drawn-out and painful process if you are lacking in experience or don\u2019t 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 […]<\/p>\n","protected":false},"author":4,"featured_media":366,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","om_disable_all_campaigns":false,"footnotes":""},"categories":[3],"tags":[],"class_list":["post-365","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-blog"],"yoast_head":"\n4.\u00a0\u00a0\u00a0Pre-empt Their Concerns<\/h3>\n