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Published: 27th August 2020
How to get your development finance application over the line
Many borrowers fall at the application stage when trying to obtain development finance. While there’s no denying it’s a complex process and it’s likely to get even more challenging as the ripples of Covid-19 continue to be felt across the property sector, there are still great opportunities to be had for the well-prepared and savvy borrower.
Brickflow’s Ian Humphreys and Callum Ferguson from Alpha Property Lending discuss what lenders are looking for in an application and reveal how borrowers can boost their chances of getting the best possible terms.
What’s the most important factor a borrower should consider when approaching a lender?
Be prepared and make sure you know everything about a project you’re taking forward or putting in front of a financier. Lenders will go through everything with a fine-tooth comb and ask a range of questions about the potential development or investment project. Many things are in the public domain and it looks much better from an optics point of view if you know the investment or development project you’re taking forward back to front.
If the lender is having to point out key information to the client, then it really doesn’t look good and means the lender either won’t offer terms or they’ll offer higher terms.
It’s really important to think about what questions lenders are going to ask before you approach them. Lenders are going to be really interested in who you are and who else is involved in the development.
There’s loads of information in the public domain, for example the planning, the survey, the tenants and the target market, so you need to be armed and ready with all of that when you’re approaching anyone about potential finance.
The other point on this is about timing. Alternative lenders can perform quickly – pre-Covid we could do first approach to drawdown in about four weeks, the average is about six weeks. And this all depends on the lawyers and valuers performing within those timeframes as well.
In this new post-Covid landscape, I would allow plenty of time to get your finance in place because people will be asking more questions, be more diligent and there will be even more professional surveys to go through to make sure everyone has got their indemnities and warranties in place. Many people are also still working remotely so, as much as lenders are functioning at 90%, there is still that 10% of things that don’t run smoothly when people are not in the office.
The other factor is that there are people who will perform and get money out the door very quickly, but they do carry an extra cost. So if you want the most competitive terms, give everyone a fair period to turn the transaction round.
You always need some data points to take into the lender, you can’t just rely on advice. We always like to see some level of work and due diligence from a developer or investor when they approach us.
It’s a question of credibility. Most lenders on our platform agree that they complete one loan for every 25 enquiries they see. That means you have a one in 25 shot, so don’t turn up with a half-baked case because you’ll be one of those 24.
You really need to stand out to be the one who gets the tick, especially in the current climate. Lenders will be more choosy and, if they don’t believe in you, they’re not going to back you.
The numbers are the numbers – they get you through the door – but if you’re not credible, you won’t get the loan.
How important is it to be upfront with a lender?
Transparency is my bugbear at the moment. Lenders are all very realistic people – we know that no borrower or real estate transaction, whether it’s a development or investment, is ever perfect. But if a lender finds something that’s a real issue and it’s out there in the public domain, then it always means the transaction will be on the rocks or the borrower will have to pay a very high interest rate so the lender feels like they’re getting the right risk-reward.
The most common piece of information that’s withheld is some kind of adverse financial history, which isn’t brought up at the beginning but is found out in the due diligence or the searches.
Lenders will make a judgement very quickly if you disclose adverse financial history straightaway and provide an explanation. We’ve taken transactions like that, but only when a borrower has come to us and said, for example, “look, this is what happened. One of our guys was defrauded by a solicitor”. These things do happen and there can be legitimate reasons why good people hit some problems.
The most frustrating thing for everyone is when we’ve all done a lot of work and the borrower has incurred costs by paying for things like valuations and legal work and then something that should have been disclosed comes up at the last minute. It’s where no-one wants to be.
The best approach for getting debt, particularly in this market where people are bringing in their loan-to-value governances, is to approach it warts and all. Explain what the issues have been, where there might be any kind of adverse press or history of difficulties with the site, and let the lender take a view. Don’t hope it will be OK and that the deal goes through because unfortunately it never does.
Lenders will pull out or heavily reduce their exposure even if something comes up towards the end of a transaction. Transparency really is of paramount importance, especially in today’s market.
How do you find the right lender for your project?
You really do need to research the whole market as there are now hundreds of ways to finance a project. This means it’s really important to speak to an expert like Brickflow who can make sure your project is funded by the right lender or combination of lenders. Brickflow make it their business to know the whole market and they help borrowers find the right piece of the puzzle.
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. If that relationship doesn’t work the whole process is going to be a struggle, everyone will incur extra costs and it won’t be fun for anyone.
That means it’s really important to find the right lender for your project. Talking personally, if it’s not for us we’ll quickly say it’s not and try to point the borrower in the right direction to someone who may be able to do it.
Property is a very social industry and lenders are no different. We all talk to each other and generally know what deals are working for each lender. Platforms like Brickflow will sift out the right lenders for you to approach.
I’d also never advise someone to have all their eggs in one basket. It’s good to have a couple of deals with a panel of lenders that you like and trust.
If you do have multiple deals on the go, it’s equally important to not be fully exposed to one capital source as it’s a very different landscape out there.
I think that’s right. Lenders will normally try to insist on some kind of cross-collaterisation if you’ve got multiple deals with them, especially with development that’s higher risk. If one of those deals goes south, then they have all of those deals in the basket which can mean they are all negatively affected.
To Callum’s point about shopping around, it absolutely has to be done on every deal because every lender has a different way of calculating development finance and every lender has different niches they want to try to fill.
The chances of the same lender being the best solution on every site is basically zero.
By the same token, you need to be very strategic with your approach to the market because, as Callum said, the market is very social. If you go scattergun and send the deal to every lender in the market, it will start to get a bit of a bad name which is very difficult to undo. We’ve seen it before where deals are good deals, but lenders get scared because the borrower has perhaps not been strategic with their approach to the market. As a lender, if I’ve seen it and if I know everyone else has seen it, why am I going to be the one who takes it forward? There will be a fear that you’re missing something that everyone else has seen, so it makes you not want to get involved.
There’s also the huge amount of work that needs to be done on development deals, and if you know that it’s been chucked around the market you’re just not going to invest your time to get comfortable with the deal. Unless you’re the cheapest or offering the most amount of money, there’s a good chance your work will be a waste of time.
What do you do if there are risks involved in your project?
It’s really about mitigating the risk that you may find. A borrower will have done their preparation and seen there may be a couple of things that come up as a risk, so now it’s important to tell the lender how they’re going to mitigate that risk rather than be led the other way by having the lender build something into the facility to mitigate it. Something like an overage could be one way, if you felt like you were paying too much. Or if it’s a difficult build, for example there’s a lot of basement space, you can mitigate that risk by using a contractor who has years of experience delivering projects with large basements.
Even for construction projects that are quite straightforward, it’s always good to have a quantity surveyor or another expert look at the site and identify areas of concern, so you can show you’ve thought about it from a lender’s perspective. That’s really reassuring, builds credibility and means the borrower will be offered the sharpest terms.
Similarly, with investment if there are issues with, for example, a tenant’s financials, you can help by building in a guarantee or putting something in the lease.
The same goes for yourself as a borrower. Even if you have done a number of property investment deals before and you’re now looking at moving into development for the first time, the lender will see you as a higher risk. To mitigate that, you can surround yourself with very experienced professionals who can do the deal you’re presenting in their sleep. It also may be a good idea to get a seasoned property developer to become a part of your shareholding.
As a lender, it really helps from an analysis point of view when a risk mitigation strategy is put forward by the borrower.
We will most likely tweak it and then make our offer, but it gives the borrower an advantage.
How do you pick the right partners?
Knowing the people you’re going into business with is essential. From an investment perspective, you should know about the tenants you have in the building, for example their financials, their trading and whether there are any issues coming up. The same goes for contractors on the build side; it’s important to look into their turnover, how profitable they are as a business and what their balance sheet looks like.
There will undoubtedly be businesses struggling with cashflow issues for the next six to 12 months and maybe beyond, so it’s vital you trust the people you’re working with and know their business as well as you know your own. It doesn’t look good if a lender finds out a contractor you’re putting forward for a project has adverse history.
It’s worth knowing if a potential partner has worked with someone you know, and a personal recommendation goes a very long way.
Try to get a reference at the very least. There’s nothing worse than hearing: “Oh, we think we’re going to use these guys because their website looks good.” That isn’t enough. It helps if their website looks good, don’t get me wrong, but have you checked them out on Companies House or looked into their previous clients?
It’s really worth spending the extra time to make sure you’ve got the full picture.
How can I find deals in the current market?
Leveraging your network is another really important point at the moment. The government has supported everyone admirably over the past few months, but there will come a time when that money stops and reality will kick in.
The bigger your network, the more opportunities will come your way in Q3, Q4 and beyond.
We think this is the case because there are a lot of people who buy for planning gain and have no intention of developing, but they will often use a bridge or another financial instrument to secure a site. Now, a bridge might be for 12 months and three to six months of that timeline has been lost because of what’s gone on with Covid. What was initially plenty of time to get their planning and sell is now getting to a point where they might just sneak their planning before the end of the bridging term, but perhaps the value has come down on the land and now they’re forced to sell or find a developer who can build it out. So I think being pally with agents, other developers and other people in the space like construction lawyers will be beneficial as they will come across opportunities.
How important are guarantees and using your own equity?
Personal guarantees are something that have become almost industry standard post-2008, and if you do want to borrow more than 50%-55% loan-to-value on any scheme you’re going to need to provide some sort of personal or corporate guarantee.
They are something you really need to get comfortable with as lenders will ask for them, particularly if you want to borrow high leverage amounts. That being said, security as a whole is a package, so if you want to borrow sub-50% loan-to-value then the security of the asset will probably be enough.
We have also used second charges over assets instead of or in addition to guarantees to make the leverage level a little more comfortable. That means a borrower can think about putting up other assets in their portfolio as collateral and allow second charges.
Additionally, if you have an equity partner in the scheme, like an investor, it’s really important that you work out with them early on who’s going to be putting up the personal or corporate guarantees on the different deals, so you don’t get any nasty surprises later on.
When we receive a deal and it’s made clear that the borrower won’t provide guarantees under any circumstances, that deal usually goes to the bottom of the pile, particularly if they’re asking for top leverage. Whereas it’s a very different conversation if they’re asking for reduced leverage and won’t do guarantees, but we can have a second charge on another asset.
Make sure you have the guarantees and securities discussion early on because it can affect the rate you’re offered. It can be very hard to meet in the middle if you and your lender are at polar opposites.
It doesn’t send a great message to investors or debt providers if you’re not willing to put some money into the development yourself, especially in the current market. Ultimately, if you’re not willing to risk some of your own money, why should they?
It doesn’t need to be the full amount – it can be 20% of the total equity, sometimes less. We’ve had deals where the leader of the deal has only got about 10% of the overall equity in the piece. But there needs to be something and someone needs to provide a personal guarantee because there’s not a lender out there who will let you borrow without some form of personal guarantee above 50% or 55% LTGDV. Plus, your investors aren’t going to provide the PG if you’re not, so everyone needs to be aligned.
I completely agree. It’s very, very difficult the less money you’ve got in. A lender’s biggest fear is that the keys are thrown at them and the borrower disappears. So, if a borrower has no money in the deal that’s obviously a higher risk, and it puts them on the backfoot from the start.
For a handy and easy-to-read guide on what lenders are looking for in a development finance application, take a look at How to Get Your Development Finance Application to the Top of a Lender’s Pile.
To find out more about how Brickflow can help you secure the development finance, get in touch on 020 3488 1674 or email email@example.com.
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