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Commercial Watch: Development finance on the rise

Detailed information and project costs are secrets to lender success

There has been an increase in activity in development finance over the past couple of years and this continues at pace. Add to this ‘stretched senior debt’, ‘mezzanine finance’ and ‘joint venture finance’ and it is no wonder that development finance falls into the specialist lending sector and often requires a specialist broker to find the right finance for the client.

Funding is indeed possible across a whole variety of schemes, including meeting increased demand for funding with the client putting in as little of their own cash as possible. However, a lender’s appetite for projects does depend upon the quality of the information submitted at the outset. This is necessary to get a lender to buy into a project and to highlight the developer as being the one they want to work with.

Important points to consider

When submitting a development finance application, the concept of ‘less is more’ is counterproductive. The secret to getting a great result is about making sure there is a thorough understanding of a few key areas:

The lender will want to know what experience the developer has, examples of other projects they have completed of a similar type and scale, and who is in the team – including architects and structural engineers. All this information can give credibility to the project as a whole. If a broker gets this right, then lenders in the market for the type of project will want to work with the clients.

The costs involved in the project and when they are likely to hit are key. The client should not necessarily concern themselves with finance costs but do need to provide a detailed overview of estimated costs that cover the project from start to finish.

More important is detail on how they expect the provision of funding will be timed.

This will of course all change and move as the client moves closer to starting the build. However, the developer will work closely with the lender, so should not be worried about this being on a ‘best endeavours’ basis.

With this knowledge, lenders can model in a manner that helps them feel more confident about the flow of monies and associated cash risks, and can therefore provide more accurate and competitive indicative figures.

What the project is exactly is where pictures paint a thousand words. Generally the developer will have designs of the building together with the planning consent. Make a decent summary of what the client will be building and the expected sale prices of the various units to support the overall gross development value and any supporting evidence.

To help keep finance costs low, a broker can perform de-risking for the lender. If anything in the project has been either pre-sold or let, then tell them as this will lower the cost.

A good investment in these three key areas will result in a much stronger initial response from lenders, far more competitive pricing and a higher level of support. It will also increase the credibility of the broker as a seasoned developer will expect to provide such information.

Currently, not many projects have the ability to be almost fully funded by a senior lender, however it is also possible to utilise mezzanine lenders. Think of these as a second-charge bridge in the development space. This would usually be drawn on to assist with the purchase of the site, but could also pick up later costs in the project.

Mezzanine funds are more expensive due to the high level of risk for the lender, with typical annual rates being 18-22 per cent. However, it may reduce the client’s capital needed in the project to just 10 per cent.

Whilst the rates may seem high, this will be on the smallest of the two debt amounts and can often facilitate the client achieving their project and resultant profits.

For the inexperienced developer, or one who does not have any capital, there are joint venture lenders who can support a project, providing 100 per cent of the funds for a share of the profits. Keep in mind that these are determined very much on a case-by-case basis.

Whilst development finance deals may be outside of a broker’s comfort zone, with the right support you can be confident to have those conversations with prospective developer clients and win the business.

Kevin Thomson is sales director at Connect for Intermediaries

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