By Noel Meredith – Executive Director – United Trust Bank
Although a recovering economy, a steadily improving property market and a number of new entrants to the sector have helped to increase the availability of development finance, for many brokers, finding a lender willing to fund residential developments can still be a challenge. During the boom years, when money to build homes was easy to come by, you could approach some lenders with nothing more than a few rough figures scribbled on to a piece of paper and still come away with a handshake and a substantial funding line. Those days are gone, but with a little forethought and preparation you can play a pivotal role in securing your clients development finance for a wide variety of projects.
The first step is to build a full picture of the client’s needs. For example, what are the key metrics of their project, Gross Development Value (GDV), site cost, construction cost and how long will it take to build? Have they acquired the site already or will they need funding for the land purchase as well? How quickly do they need the first tranche of funding? How much money do they have and want to invest in this project?
Next have a close look at the developer’s finances. How much cash is being committed by the client and where is it coming from? What other projects are they currently undertaking? What other financial commitments do they have? Can you provide details of any additional resources the developer may be able to call upon to cover any unforeseen problems or delays which may give rise to additional costs? Show us a breakdown of the borrower’s current assets and liabilities so that we can see the whole picture and be fully aware of any exposure elsewhere. Some clients will be reluctant to provide this level of detail from the very start, however a summarised view will help the lender to form a view of the overall proposition. Borrowers should be under no illusion, full disclosure will be required in due course and will show us that your client is prepared to be completely open and honest with us.
Lenders want assurance that the developer, his professional team and any contractor they may employ, have the necessary skills and experience to complete the project successfully. Compile information on their previous projects including specifications, sales particulars, photos and prices achieved compared to their original plan. If the developer is employing a main contractor, show the lender that they too have a strong track record of delivering a quality product on time and on budget. United Trust Bank is always keen to work with developers with a strong focus on great design and quality and we’re also happy to consider more unusual projects as long as the developer can demonstrate experience in that field.
Provide a postcode or exact location of the site so that when we are carrying out our initial appraisal we can view the location on Google Earth and get a good idea of the surroundings. We want to see that the developer understands the strengths and weaknesses of the location and how the project fits in to the locality. What is the local economy like? Are there good employment prospects or is it a commuter location, in which case are there good transport links? What are the other drivers of demand in this location? Is it schools or other local factors? Why will people want to buy the proposed homes? The developer should compile market intelligence including the details and asking/selling prices of comparable properties. You may not need all of this material for the initial proposal but a lender will want to see it at some point during the due diligence and will be impressed if you can supply information like that when asked.
Armed with that information you should now be ready to put together a shortlist of potential lenders. There are several key factors brokers should consider when selecting which lenders to approach.
Your first consideration will be which lenders are most likely to look at the project in terms of the amount of loan required and the ratio of loan to costs or GDV. For example, UTB will consider loans from around £0.5m up to around £20m but other lenders will have a different range which may rule them out from the start. Assuming the loan size is acceptable, the next factor to consider is the gearing. If your client is looking for no more than around 60% of GDV (70 – 80% of costs depending upon the projects appraised profit margin) there are a number of lenders to choose from, including UTB, which offer very competitive rates with all the added benefits of working with a development finance specialist. Alternatively, if the client is providing the majority of the money themselves, has a proven track record and a gilt edged financial standing you may be able to persuade a High Street lender to take it on. In most cases however, when you’re arranging finance for an SME developer requiring a reasonable LTV and a quick decision, a specialist development finance lender is probably going to be your first choice. For higher LTVs you will need to consider lenders offering stretched senior or a senior and mezzanine combination and, as you would expect, the higher the LTV, the fewer your options and the more expensive they become, so you will need to manage your clients’ expectations.
Lender flexibility is very important, especially when perfectly straightforward proposals are rare, and working with experienced and knowledgeable people who can advise on various matters beyond the financial can also be of huge benefit to the developer, and to the broker, especially if you’re fairly new to the development process. Collectively, the Development Finance team at United Trust Bank have well over 100 years of experience in the home building sector between them and there’s not much one of us hasn’t come across at some time or another.
With each proposal we tailor a finance package ideally suited to the circumstances of the borrower and the project. And because we know that builds don’t always go exactly to plan, we have the flexibility to adapt to changes quickly and professionally.
When a developer approaches a broker to help secure funding they will want to proceed quickly. They won’t always need the money immediately, but they will want to know that they have a finance which will be ready to release funds when they need them. Alternatively, in some cases a developer may already be incurring project costs and every day of delay may be eating into their margin. A quick initial decision from the lender, which can be relied upon and is swiftly followed up, enables the broker to demonstrate to their client that the lender they recommend is able to move at their pace. Delays at this early stage might suggest to the developer that the lender will not be as responsive as they would like, especially if problems are encountered later on. This may in turn cause them to doubt their broker’s advice. As such, a quick initial decision from the lender will help the broker to cement their relationship with their client from the very start. At UTB, if given the information we need at the outset, we aim to carry out a desk top appraisal of the proposal and give an initial indication within 48 hours. We will then aim to meet the broker and the client within a week or so to inspect the site, gather further information and to finalise the loan structure. Credit Committee approval should follow swiftly giving the developer the assurance of a loan offer subject to satisfactory due diligence.
It is helpful if the developer is prepared for the due diligence process. The lender’s professionals, valuation surveyor, QS and lawyer will require information on specification, planning, detailed costings, tender results and a host of other information. If this information is not on hand, the process will stall while the developer and his team produce the data. Occasionally the due diligence process will throw up a surprise or two. Maybe the valuation doesn’t reach the expected level or the lender’s QS feels the proposed construction costs are too low. Broker and developer should anticipate this possibility and from the outset ensure that the funding level sought will not exhaust the developer’s resources. In the event of due diligence surprises the whole proposal may fail if the developer cannot introduce a little more cash or offer some other assets as additional security. In short, seek the best funding package available but be prepared for some flexibility.
Once the developer starts to draw on the loan, the lender’s representatives will probably have more frequent contact with the developer than the broker will. It’s therefore vital that you recommend a lender you can be confident will get on with your client and deliver the level of service you demand. This will ensure that when your client comes to fund their next project, they will return to you for the recommendation.
When it comes to service, we understand what matters to developers. We are frequently complimented on our ability to arrange quick, sometimes same day, pay-outs on the completion of stage inspections by our quantity surveyors. This may not sound like an outstanding USP, but it’s something many developers have experienced problems with from other lenders. When a developer needs to pay suppliers, labour or contractors for example, delaying payment by just a few days because of a slow release of funds can have a significant knock on effect to relationships with important subcontractors, and can push a project off schedule. Every day added to the project timetable costs the developer money.
So there you are. Prepare a well-researched and substantiated proposal demonstrating an in-depth understanding of the project and the developer’s financial situation, combine it with careful lender selection, taking into account the size of the loan required, the LTV and the experience, speed, flexibility and service standards of the lender, and your success rate for development finance proposals will substantially increase. Impress lenders and developers with your knowledge and attention to detail and you’ll quickly gain a reputation as someone both will want to do business with.