Getting the application right is a vital factor in determining whether borrowers will receive a loan for their property development or investment. Callum Ferguson, Head of Business Development at Clearwell Capital, reveals what lenders are looking for in a development finance application and explains how you can increase your chances of getting the best possible terms.
- Be prepared
- Be transparent
- Research the whole market
- Identify and mitigate risks
- Know your partners
- Guarantees and security package
As a borrower, it’s essential to know everything possible about the potential investment or development project you’re looking to finance and put in front of a lender.
Lenders will go through everything with a fine-tooth comb and ask a range of questions about the potential development or investment, so it’s important to think about the questions you’re likely to be asked before you approach them.
There is so much information in the public domain, such as the planning, ownership history and the target market, as well as information which can be found through credit agencies and Companies House. Ensure you’re armed and ready with this data and you have thought about how it applies to your project, but also make sure you are completely transparent with your own previous conduct.
It’s also important to allow plenty of time to arrange finance. This is even more the case in the post-Covid landscape because lenders will be asking additional questions and will be even more diligent.
Costs will often increase when lenders and professionals work to tight timeframes, so to get the most competitive terms, give everyone a fair period to turn the transaction round.
Research by Brickflow reveals that lenders believe only one in 25 loan enquiries results in a development loan. These are phenomenal odds to overcome. To increase your chances you need to stand out and be credible, especially in the current environment where lenders are being more selective.
Make sure all relevant information is provided to your funder as soon as possible so optimal terms can be agreed.
The best approach is always ‘warts and all’. If lenders feel information has been withheld, pricing is often increased or terms can be withdrawn.
The most common piece of information that’s withheld is adverse financial history, which isn’t brought up at the beginning but is found out in the due diligence or the searches.
Make sure you disclose any adverse financial history immediately and provide an explanation. Lenders will then make a judgement very quickly. Don’t hope it will be OK and that by keeping quiet the deal will go through. It never does. Unlike lenders in other sectors, development lenders, generally take a more relaxed view on credit misdemeanours, where there is a good explanation. Unless of course that information is deliberately withheld.
Research the whole market
There are many traditional and alternative lenders out there who are structured and funded differently. Make sure you are viewing the full spectrum of lenders.
Speaking to an expert like Brickflow helps to cut through this complexity. They make it their business to know the whole market so can help with your search. Take a strategic approach to the market. Most lenders know each other, so it can undermine your chances if you take a scattergun approach and send the deal to every lender.
When using a combination of lenders, perhaps in a senior and mezzanine structure, make sure you know if they have worked together before and have an inter-creditor deed in place. This should ensure a smooth process, competitive terms and help you avoid extra costly fees.
Don’t put all your eggs in one basket. It’s advisable not to have all your deals with just one lender and not be exposed to one capital source.
Identify and mitigate risks
All real estate transactions have their quirks. The best possible terms will become available if you can show these have been identified and mitigated by you rather than by the lender.
Mitigating construction risks is quite straightforward. You can build a lot of credibility if you’ve identified areas of concern and thought about them from a lender’s perspective. Similarly, with investment property if there are issues with, for example, a tenant’s financials, showing a lender how you can build in a guarantee or put something in the lease will help.
Risk mitigation is just as important in relation to the borrower. If there are skills or experience missing, it’s crucial to show you are surrounding yourself with the right people to ‘plug the gap’.
Lenders want to see that borrowers have analysed the risks and provided a risk mitigation strategy. While lenders will most likely tweak this strategy, providing one in the first place increases the chances of improved terms.
Know your partners
Doing due diligence on your partners is of paramount importance.
The global pandemic means many businesses will have cash struggles in the short to medium term, so it’s vital that you know and trust the people you’re working with. It won’t look good if a lender finds out a contractor or tenant has adverse history.
It’s worth knowing if a potential partner has worked with someone you know – a personal recommendation goes a long way. Additionally, try to obtain a reference and get the full picture by, for example, checking out their previous clients and looking them up on Companies House. Don’t choose them just because they have a flashy website.
Guarantees and security package
Personal and corporate guarantees are very important from a lender’s perspective, particularly when equity is coming from a third party and if you want to borrow more than 50%-55% loan-to-value.
When deals are sent to a lender and the borrower says they won’t provide guarantees under any circumstances, that deal is often sent to the bottom of the pile particularly if the borrower is asking for top leverage.
If guarantees are not available, think about how else the security package can be supported, for example by charges over assets or cash on account.
Make sure you have the guarantees and securities discussion with your lender very early on because it can affect the rate offered.