Understanding lenders’ criteria for development funding
The economy remains on the edge of recession and the mortgage market is operating at a fraction of its pre 2008 capacity. Against this back drop it would be surprising if anyone was initiating speculative residential development but the truth is that a significant number of private developers are embarking on new projects. Obtaining funding however can be a major hurdle.
At United Trust Bank we continue to see large numbers of enquiries and are completing record numbers of development loans. But we don’t lend on them all so why do we fund some projects and not others?
Before 2008, some banks offered development finance to just about anyone who could acquire a site and the services of a builder. The folly of this approach has been well evidenced. Banks now want assurance that their customer is a highly experienced and professional developer. It is not enough to secure the services of a project manager, architect or contractor because, as good as these might be, one of the key drivers of success in the development world is the knowledge and experience of a developer who can conceive the right product and then manage an increasingly complicated delivery process.
Pre credit crunch money was in plentiful supply and banks were lending ever increasing proportions of cost. Often few questions were asked about the borrower’s finances and many banks didn’t seek personal guarantees. Nowadays lenders want to make sure that if anything goes wrong they are not the ones left holding the baby. Lenders expect to get their money back, including the interest and fees, therefore borrowers should expect to give personal guarantees. Lenders will also want proof that the guarantors are good for the obligation. The guarantor’s net worth should ignore any investment in the development because if the guarantee gets called the project will already be in trouble.
“Location, location, location” the old property man’s mantra is as true today as ever. Lenders will look closely at the local market, how busy it is and what type of properties are selling. What are local income levels and can potential buyers afford the deposits necessary to get a mortgage? Unless clear and positive evidence of an active market can be provided, sensible lenders will say ‘no’. I am regularly asked if we will lend in the North or in the Midlands or in Wales? The answer is yes provided demand can be proven. There are active areas with prosperous populations in all of these areas just as there are some parts of the South that are not.
When talking to clients seeking development finance remember these key questions. Does the developer have a successful track record? Do they have a good financial standing and is the development well located? Like the popular TV talent show, if you get three yes’s you’re through to the next round.