We work with over 50 funders/lenders who lend on property investment, development or bridging. Terms and conditions, the percentage of loan to value and interest rates vary so much it is a minefield. Some lenders have relatively low lending ceilings others have high thresholds.
The choice of funder can greatly affect the profit retained by the developer and depends on amongst other factors on the cash available to the developer. At one extreme a developer can simply borrow 100% which will seriously deplete the profits but as there has been no investment the return on investment however small is excellent. At the other extreme a small loan of below 50% is not uncommon. However, the most common loan is where the developer owns the land and borrows the construction cost.
So how can a developer successfully fund a development?
Finding a new or suitable funder is challenging. The DIY approach is time consuming and it is very much a lottery finding the right funder. Using a general broker without development expertise is also a problem unless you are recommended to a specialist. Many developers opt for appointing as many brokers as they can find which is usually disastrous. Funders presented with multiple applications presented in different ways are not usually sympathetic.
Funders hate half-baked requests for funding so prepare well.
The information a funder needs includes
·An overview of the development and the planning decision number and details of any S106 payments or obligations and the Community Infrastructure Levy to enable the funder to carry out basic research.
·A financial appraisal which should include everything (this means professional fees overages sourcing fees and so on) and have a suitable contingency reserve of on the build cost.
·An agent's view on (a)sales prospects, (b)time scales and (c) comparatives for the area.
·Either a well-researched build cost or quotation from a reputable builder. Funders are looking for any contract to be built out by a reputable and experienced builder who will be able to ensure the 10-year warranty is available.
·A detailed cash flow showing cumulative borrowing.
·Who the directors and shareholders are together with assets and liabilities and statements from the directors who will be giving the inevitable personal guarantees.
Funders charge fees both at the start of a development and at the end. Initially there is an arrangement fee and a procurement fee paid to the broker. Sometimes there are also Exit but care must be taken that the exit fee is a percentage of the loan and not of the GDV
Finally, relationships matter and developers should not necessarily go with the cheapest but with a funder with whom they are comfortable and one they feel they can work with.
For more information please contact me
Williams & Co
Chartered Accountants and Corporate Finance Advisors
New Maxdov House
130 Bury New Road
Use name Twitter: CorpFinanceManc
Office: 0161 773 2006
Mobile: 07931 390271