Property development is an exciting and dynamic sector to be involved in. However, securing funding for your project can be complex, time consuming and stressful if it isn't handled properly. With over 20 years experience in the development finance sector, I certainly don't proclaim to have 'seen it all', but I think I am well positioned to outline some top tips to help you avoid the typical pitfalls and ultimately secure funding.
Ensure you have enough 'skin in the game'
Whilst potentially somewhat cringeworthy, it is vital to any development finance application. 'Skin in the game' is essentially the amount of cash equity you are prepared to commit to the total costs of your project. The reason being a lender wants evidence that you are financially committed to your project.
When seeking the maximum debt leverage, the general rule of thumb is that 10% of total product costs is required by way of cash equity (or hard equity) from the developer/borrower. Many lenders will not recognise the equity achieved as a result of planning enhancements/value adds, as a valid contribution to the cash equity requirement. However, this is not always the case and Montpelier Private Finance has recently been able to secure terms for a residential scheme with a minimum of just 4% hard equity required and a remaining 6% made up through soft equity (in this particular case the deposit monies from pre-sales of apartments).
Have the mindset of an underwriter
It is natural that a developer will strongly believe in their project, however it is important that this does not result in overoptimism on the deliverables of the project. Those underwriting the funding will be looking for confidence that the projections are realistic and can be backed up with local market data. Whilst not an exhaustive list, the typical areas to be considered are:
The Gross Development Value (GDV). This is the future value of the site on the open market once it has been developed. Given that lenders determine how much they are prepared to lend as a % of the GDV, it is important to have fully researched values prior to the funding application.
Acquisition costs. This will likely include the site purchase, Stamp Duty and Land Tax (SDLT), professional fees, planning costs, Community Infrastructure Levies (CIL) and Section 106 costs. All of these will need to be accounted for in order to ascertain the profitability of the scheme.
Build costs. In addition to being able to demonstrate reasonable construction costs, there will need to be adequate provision for contingency funds (typically 5-10% of total build costs)
Finance costs. These typically include an arrangement fee, coupon, exit fee, valuation fees, professional fees and disposal fees.
These figures will be presented to a lender through a development appraisal and will be ratified by a valuer and monitoring surveyor on behalf of the lender. Local market data with comparable projects will be used to support the valuer and monitoring surveyors conclusions. A developer adopting this mindset is far more likely to achieves the forecasted figures.
Ensure there is a strong team around you
The experience of the team carrying out the project is crucial, particularly if you are an inexperienced developer. The lender will be looking to gain confidence that the scheme can be delivered on time and on budget. If the developer is inexperienced, appointing an experienced team of contractors underpinned by a strong CV will help to give comfort to the underwriter.
Have a solid exit strategy
A lender will want assurance that they are going to be able to get their money back once the project achieves practical completion/expiry of the loan term. If the asset is going to be retained then evidence of the funding strategy will be requested. If the asset is to be sold, the lender will want to see that there is local demand at a value that enables the repayment of the loan and the likely timeframe to achieve said sale.
Use a specialist broker
There are a number of benefits that a specialist broker should be able to offer, which include:
Access to whole of market funding lines
An experienced specialist broker will have years of contacts and relationships, many who only deal with select financial intermediaries, rather than the wider broker market and direct to client. In the case of Montpelier Private Finance, we source debt funding from but not limited to:
Family wealth offices
Private banks
Real estate funds
Challenger banks
Peer to peer lenders
Overseas banks
Niche lenders
Clearing banks and building societies
There are always new entrants to the lending market, and a proactive broker will ensure they are aware of such lenders.
The internet is, of course, a wonderful tool but is a gateway to only a small slice of the lender pool. Further, it is also worth noting that in the current economic environment, lender's headline criteria such as loan size, the maximum loan to cost (LTC) and loan to gross development value (LTGDV) alter quickly and their websites as a result, do not give a true reflection of their current offering.
Selecting the right lender for your particular project
Having access to a whole host of funding lines is only part of the solution. Your chosen broker should know which lenders are best suited to a particular scheme. In addition to the basic requirements of loan size, LTC and LTGDV caps, each lender will have their particular preferences when it comes to asset class, location, build type, developer experience, applicant credit profile, personal guarantee requirements, residency status and company structures, to name but a few. A lot of time and needless stress can be saved as a result of engaging the right broker.
Ensuring the strongest possible application is put forward
A broker should act as a sense-checker for a developer prior to submitting an application. With the experience of understanding what is required by the lender. Just to be clear, this isn't about hiding or manipulating information, but guiding and challenging where necessary, to ensure that the strongest possible application is put forward. Montpelier Private Finance is always very thorough in terms of due diligence prior to an application being submitted for this exact reason. Assessing areas such as costings, the suitability of contractors, and the detail of the development appraisal can increase the possibility of procuring funding, but also potentially save wasted time and money on applications that have no realistic chance of being successful.
Reducing the stress involved procuring funding
A development finance application can be complex and stressful. A specialist broker should add value in making the application as smooth and stress free as possible for the applicant. In liaising between the lender, the applicant, legal teams and surveyors, much of the leg work can be shouldered by the broker.
Montpelier Private Finance specialises in procuring market leading development finance solutions for our clients throughout the UK. Funding solutions are sourced but not limited to high street banks, challenger banks, funds, family wealth offices, pension funds and offshore institutions. We are not afraid of complex cases and work at pace. Contact us here if you wish to discuss a project or email enquiries@montpelierpf.co.uk