Development finance tips include: preparation, timing, financial transparency, risk mitigation, finding the right deal/partner/lender, guarantees &...
Find out why, when applying for development finance, there needs to be a balance between getting the numbers right and having the right experience.
At first glance, the answer to this question might appear very easy. The site is, of course, the most important. Isn’t it?
To a degree it is. It’s certainly the case that you wouldn’t get as far as the lender’s front door if the numbers on the site didn’t stack up. However, whilst the numbers will get you through the front door to speak with a lender, if you don’t have the experience, the front door is as far as you’ll get.
We always say to clients, that the numbers are the numbers.
Yes, you can negotiate the land cost or build costs lower, which may increase your profit margin, or make the difference between whether a marginal scheme works or not. However, if the numbers are way off at the start, then you could be the best developer in the world, and you wouldn’t get funding.
By way off, we’re talking about the profit margin in the deal. All lenders will (and all developers should as well), complete a sensitivity analysis. If build costs were to increase by 5%, 10% or 15%, how would this affect profitability? Simultaneously, how would a 5%, 10% or 15% drop in the GDV affect profitability?
Most lenders are looking for a minimum of an 18% profit margin after all costs. This is a figure for London and the South-East. Lenders will expect regional developers to operate at greater margins – a minimum of 20%+, perhaps closer to 25% in some areas.
As before, if you’re hitting these numbers, then a lender is likely to be interested in discussing further. However, this is where the pendulum swings, and the experience becomes key again.
Ultimately, it can be the most profitable scheme a lender has ever seen, if you have no development experience, funding will be impossible.
If you do have a good scheme, but not the experience to match, then all is not lost. Collaboration on a JV basis, or appointing someone that does have the experience, on a performance incentive basis may well do it.
To find out more about how to mobilise a scheme, please read the blog on How to become a (really good) property developer.
If any of the above topics are relevant to you and would like to discuss further, please call us on 0203 488 1674 or email us at email@example.com