Presenting an application to a financial organisation for development finance is an art form that requires a degree of skill and experience in order to get the proposal pitch-perfect. By perfecting an application, property developers can maximise their chances of a quick and positive decision putting an element of control back into their hands if they are allowed to cherry-pick between different lending institutions. They are also likely to secure better and more favourable terms.
There are five important metrics which finance organisations are interested in and these are:-
- Your development experience – your track record and the strength of your previous portfolio are very important as it demonstrates a sound history of build success to the lender you are applying to. Pick your lender carefully based on the strength of what you do and also bearing in mind whether you need a more specialist lender such as organisations who provide funding for first-time developers
- Your time availability – lenders don’t always want to see a ‘hands-on’ approach to functional tasks as this can indicate that you are not prioritising the vital tasks that are the remit of the project manager and will get the job done. There needs to be a project leader who will drive the process forward, oversee the project from a macro view and be free to troubleshoot and manage problems. This identity of the project manager and their role needs to be made clear on the application
- Your professional team – a ‘meet the team’ section is important on any application. A lender wants to see a strong team of experienced professionals behind the build who have clearly delineated tasks and a track record of demonstrable expertise and success
- Your next project- have you done all your homework like analysing the numbers? Do you have planning permission? Do you own the land?
- Your access to funding – funding is essential to getting your development off the starting blocks. It can be hard to know which lender to approach and no-one wants to waste time putting their application before a lender who is not interested in that type of project or that status of applicant. A financial development broker can help narrow down the field and only put your application before warm leads. A solid alternative to the whole process could be invoice financing, especially of you have a backlog of unpaid invoices”
There is a new app on the market called The Property Developers Fundability Scorecard which just requires ‘yes/no’ answers to 30 questions and takes less than ten minutes to complete. This will assess how funding ready you are by issuing a Fundability Scorecard Report. Use it to test out the strength of your project before you put it before lending institutions.
Why do so many first-time property developers find it difficult to get finance?
The key thing with any investment prospect from the lender’s point of view is the risk. Inexperienced developers commonly underestimate the overall costs of planning and don’t always build enough margin for delays and problems. Most construction finance companies won’t entertain applicants who approach them directly even experienced developers so it is crucial that first-timers used experienced brokers.
What is loan packaging?
An application for finance for a construction project is more than just an application for finance, it should be a fully-fledged business plan with every aspect carefully managed and presented for the lender to evaluate. The most successful proposals have a timeline which includes:-
- The purchase of the land or property
- The build costs
- Separate itemisation of costs incurred for marketing, finance, insurance, architects, quantity surveyors and professional fees
- Disclosure of known issues and complications along with a remedy for their solution
- An exit plan which details how the construction finance will be paid off, there are many different options and vehicles for this
Remember that construction loan companies will all be of the view that every project takes longer and costs more than you ever plan for. Don’t confuse enthusiasm for optimism; this is not the time to get through on a wing and a prayer.
If you are a first-time developer then take a look at the business plans and proposals of a more experienced company; every element of their application will be totally integrated and stress-tested. Expect even more scrutiny than an experienced developer will undergo as you don’t have a track record of successful projects to point to. A good quality broker can help you present your application in the best way possible and will only it put it before construction lending companies who are warm to it.
Typically, first-time property developers tend to build new homes or commercial premises, undertake the conversion of offices into flats, build buy to let properties or renovate existing properties which may be either residential or commercial and will tend to include auction properties and buildings which are currently unmortgageable. Development projects tend to fall into three distinct phases:-
- The purchase of land or property
- Conversion of land and or property to the appropriate use
- Sale of property or the settling of the construction loan by implementing a new mortgage used to pay off the remaining balance if the property is going to be for your occupancy
These three phases can take a few months up to a couple of years. Depending on the specifics of the project, a good broker can evaluate the whole scheme and make appropriate funding recommendations.
One of the options to consider is bridging loans which are short-term finance commonly used to fund a gap in the project. Bridging finance has been around for a long time and was traditionally a vehicle used by residential borrowers who had acquired their next home before selling the one they currently live in – finance to literally bridge the gap. However, bridging finance has developed into quite a popular form of funding for commercial developments and can be ideal for first-time developers as many bridging loan financiers don’t require the security and backing of a property portfolio. However, don’t underestimate the stringency of the requirements just because the application process seems more relaxed or casual.
Bridging finance is swift, usually approved within four weeks, and typically offers between 65% and 755 of the value of the property or build. Another option to consider is a joint venture with a more experienced developer, pooling your resources so you can benefit from their know-how and property portfolio. Figures typically span up to 50% of the gross development value of your project – that is what the project would be worth once the development has been completed – a contribution towards the purchase price and up to 100% of the building costs. Some finance companies in a joint venture situation will require a profit share from the project whilst others do not.
Key aspects to consider on a construction loan
- Interest rate – the interest rate you pay will directly affect your profitability so having a broker in your corner and demonstrating how sound you are as an investment may be crucial. Not only is the rate important but also the requirement that the interest is rolled up so that payment is only made on completion of the loan term or other settlement point; this will seriously assist your cash flow during the project
- Staged drawdown – this can be arranged with some lenders and means you can withdraw the money as and when you need it reducing the interest burden as you only incur interest on funds which have been accessed not the entire loan sum
- Length of facility – delays and difficulties happen to even the most experienced developers so your broker may need to extend your financial facility and negotiate to avoid the imposition of financial penalties
- Highest LTV possible – loan to value historically has been based upon criteria like developer experience and perceived commercial risk, that apart, a well-presented application should gain the most advantageous LTV for the finance facility
Property development can be very lucrative but it is really important to get the right finance package in place as, no matter good the project is if the wrong funding has been arranged, then development will fail to deliver. This is particularly crucial for new developers but remains an ongoing strategic factor even for experienced property developers; every project is different and unique and although experience is very helpful, the funding arrangements for any project need to reflect the distinct and individual character of each proposal. That’s why many commercial finance companies look at each application on its merits and try to avoid providing averages or generalisations about their terms of business
There is lots of good advice available online and platforms which will bring together different lenders making it easier for you to do your research. A properly packaged application will still be crucial to success plus the sort of specialist industry knowledge that your average man in the street simply won’t have when it comes to choosing a commercial finance company. Not all finance is the same but then not all property developments are the same – c