Preparing for Funding
Whether you’re a seasoned developer or new to the game, there are a number of key points to understand and consider before you look to get funding in place.
1. Long Term Planning
It’s important that developers understand the long-term implications of any short-term funding decisions, and much of it centres around the net financial strength of the developer.
Personal Guarantees at 20-25% of the loan require approval, and at least 10% of the total project costs put in for site purchases. Lenders also have maximum exposure levels per client so as a mix it is important to plan ahead.
If you are looking to grow aggressively, but do not have the financial strength to support the growth for example, it may be wise to seek equity investment into the business, or a loan guarantor for the larger projects.
We always start with the developer's Asset & Liability Statement (property assets only minus debts) so we have a clear idea of what the long term holds over multiple projects.
2. Buying sites in separate companies
A common mistake we see is developers who buy their sites into the same holding company, or a company that already has debt attached to it.
Lenders ask for not only the first legal charge, but also a debenture over the limited company (or Special Purpose Vehicle SPV).
If the company owning the site has given the debenture to another lender (e.g. their bank for an overdraft/other lending), then the new development finance lender cannot lend. In order to lend, the developer would need to either clear the current debenture holder, or move the site to a new SPV, thereby incurring stamp duty. Neither option is cheap and ties up further capital unnecessarily.
Major developers always put each site in its own limited company. There is not trading other than the finance and sales related transactions. So ensure when buying sites, they are placed into their own separate limited company, with no other debt or trading activities attached.
3. Do you have the right experience?
It’s a shame that many developers pass up opportunities because they think they don’t have the experience of something larger.
There are lenders out there who will fund growth projects, so larger opportunities should never be dismissed outright!
What if you are new to developing? Well partnering with experienced project managers and contractors on a JV profit share basis can get you funding too.
There are ways and means so never believe your experience counts you out!
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4. Assessing the Viability of Sites
The basic numbers to consider relate to the loan to GDV %, the loan to Cost %, and the Day 1 LTV (if you’re buying the site).
Loan to GDV %
To be on the safe side, if the net loan you are looking for is in the 50% to 55% of GDV range, then you will have access to the majority of lenders. Up to 60% of GDV and there are options but fewer places to go (unless you plan on taking mezzanine finance). Please note that when lenders quote their maximum Loan to GDV %, it is a gross % including fees and term interest, not the net advance they will provide.
Loan to Cost %
There are many lenders who will fund up to 85-90% of costs (not including finance costs and disposal costs). So if you can come up with between 10% cand 15% of the total project costs, you will have access to 7-10 funders at any one time.
Day 1 LTV %
If you’re buying a site, most lenders will want to see 20-25% of the acquisition costs going in.
So match these three metrics up and you will know quickly whether a site is viable or not.
5. Understanding the Paperwork
As part of the loan agreement, lenders like to see additional security from contractors and service partners.
The following is typical if you’re not familiar:
- JCT Contract
- Collateral warranties
- Professional Indemnity Insurance
- Appointment Letters
- Home Warranty & Latent Defects Insurance
It is worth getting familiar with how these different parts work, so they can work for you.
6. One lender or a few?
Most developers tend to want to work with one lender and develop a relationship, and that’s no bad thing.
However, it is well worth trying 3 or 4 lenders out, particularly if you plan on multiple simultaneous projects. You will find a lot out by working with them, for example, some are more flexible with deposits, and some are more flexible with how contingency is used. Some are more flexible when it comes to exceeding loan convenants.
With most lenders having a maximum exposure per client, it may also be a necessity. With over 40 decent lenders, having 3 or 4 you can call upon is often a useful tactic.
7. What You Need To Apply
When applying to a lender, there is a standard shopping list of info to provide where possible, as below:
- Development Appraisal/Feasibility Study
- Cashflow Schedule
- Summary of the team’s experience
- Summary of recent projects (if applicable)
- Technical Drawings
- Planning Documentation
- Estate Agent letters supporting the sales values/GDV given
- Site Valuation (if one exists)
- Site Reports (if they exist)
8. So in summary
To continue with the section, click on any of the sections below:
- The Basics
- Preparing for Funding
- Assessing Lenders
- Explaining Jargon
- Did you Know?
- Asset & Liability
- Lender Comparison Data
- Free Templates
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