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Published: 6th August 2020
Meet the Lenders:
What a lender really looks for in a development finance deal
Callum Ferguson and Matthew Tucker from Alpha Property Lending give us the inside scoop
The non-bank sector accounted for 54% of all lending in the UK Commercial Real Estate market last year, comprising a significant part of the UK’s development loan book.
With the challenger bank and alternative lender sector continuing to gather pace, it’s essential for property developers to get to grips with exactly what the lenders are looking for in a funding application, and a potential borrower.
In the second episode of Brick by Brick, our new podcast for the development finance industry, we sat down with Callum Ferguson and Matthew Tucker from Alpha Property Lending, a leading non-bank lender, to give us their all-important view.
Is there such a thing as the ‘ideal deal’? And what do you really look for in a potential borrower?
I don’t think you can have the ideal deal, without having the ideal clients. It’s pretty much a relationship industry. The banks and the lenders who look after their clients are the ones who will have those clients when the time comes for the deals to be done.
With that in mind, we don’t really want to be working with people who are new to a given sector. If we’ve got someone who brings us a residential development transaction, for example, we’d like to see that they’ve done a few already. And the reason they’re coming to us is because they want to build a relationship with someone who can stand behind them.
We’ve got clients that we’re doing a third, fourth or fifth deal with because we don’t like to do just one deal and then move on. And the only way we’re going to do that is by lending repeatedly to the same people. That doesn’t mean that we can’t accept new business coming in, it just means that if we are looking to do a deal with someone, we don’t want to complete one deal and then watch them disappear to do something more exciting somewhere else.
We need to be doing everyday transactions where we know we can get that repeat business again and again. For example, if it was 20 residential apartments in a block, all Help to Buy, all going to sell very easily to first time buyers, that’s perfect. But we’ll do one of those and then we’ll fund their next one and so on.
We hope we can assist a property developer to grow in their ambitions as well but on a very organic level, rather than jumping from doing a household extension, to a 20-apartment block, to 300 houses somewhere. We’re looking for more of a steady growth.
Where do you think there is flexibility in your lending criteria? And conversely, where do you think you are perhaps more rigid?
When it comes to sectors, we’re quite flexible on industrial offices at the moment, and care homes. We’re not lending to retail and we don’t like studio micro units like those that have gone up in Croydon over the last few years and have difficulty on the mortgage markets.
In terms of flexibility, we can potentially take a view on Personal Guarantees, depending on the client and the situation. I think we always look at the landing package as a whole. So, if one area doesn’t hit the specifics, we may be able to compensate elsewhere.
If someone has an aversion to offering a personal guarantee but they’re prepared to offer us a charge over an unencumbered property instead, that’s something we can consider. I’ve even seen people try to reduce the value of their personal guarantee by offering cash on account.
We try to find a way to make a deal work, otherwise it’s not constructive or conducive to getting deals done.
One of our golden rules is that we always like the borrower to have 10% of total costs in the deal out of their own pocket. To have that cash to protect is critical, because really the borrower is the most important thing in all of this. The real estate is obviously important, but you’ve got to get into bed with people you trust.
If there’s one thing you could ask borrowers to do for every application, what would it be?
For me, the main bugbear is borrowers asking for a certain amount to build but not telling me how long they think it’s going to take. Time has a monetary value and I need to know how long it will take to mobilise, how long the build is going to take, and crucially how long it’s going to take to sell.
I need to know what the strategy is in terms of how they intend to sell. Will it be a bulk sale? Do they have someone that they sell to regularly? Or do they have someone lined up already? We’re not asking for pre-sales or a very detailed strategy, but we do need some thoughts and ideas on how they’re going to sell at the end.
Also, if that construction period is extended, which I think we’re going to see a lot more due to shortages of materials and labour, what’s going to happen if they overrun by two, three or six months? Borrowers should be thinking about this from the outset and considering what the cost is going to look like for that additional money. Does it mean their profit is going to be eroded further in terms of finance costs, and if so, does that make a deal unviable?
Transparency is probably the most important thing when it comes to the developer. If there is a problem, we can usually find a way around it if the fundamentals of the transaction and the borrower are good enough. We see a huge number of enquiries where within two days, we’ve made a quick search and found adverse financial history. If we haven’t been told, we immediately don’t want to deal with that person.
Whereas if someone comes to us and explains they had a really terrible time in 2008 and they’ve got a bankruptcy on file but it was because of XYZ and we can corroborate that, we can still lend, we just might charge a bit more to compensate for the risk. But we have lent to borrowers like that and got them going again.
It’s really about being transparent. Tell us the issues and potential pitfalls and how can we mitigate those, and we can do it together, collaboratively. There’s nothing worse in property development than people going quiet or leaving the bad news until the last minute.
I think both of these points come back to the same thing, which is risk. If we can understand as many of the risks as possible from the outset, we can give a borrower the best possible terms. If we have to find out potential issues for ourselves, it adds an extra layer of risk, which is really crucial for developers to acknowledge and understand.
Do you think technology has a role to play in terms of improving the application process, and helping you to find the right borrowers, and vice versa?
One of the things that we like about Brickflow is that because you have the AI that sifts through the models and the deals to try to match the right client with the right funder, it means we’re more likely to take it forwards. We know if we get a deal through the platform, it has already gone through that first tier and it’s more likely to be a fit. That cuts down on a lot of time from our side, and lot of effort because we have to go through everything so carefully.
If Brickflow can help take our hit rate from 1 in 10 to 1 in 2, we’re happy. At the end of the day we’re lenders and we’re here to lend money. We want to lend money, and we actually have the cash to lend, so we don’t want to be wasting time on the other nine deals.
We don’t see anything from that; that’s not a productive process. Getting down to the point where we’re spending more time actually focusing on taking a deal through, underwriting it and then getting the money out is what we want to be doing, so anything that helps us do that is also good for us.
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