April 19th, 2023. Tom Lee
Structuring A Successful Development Deal
I often get asked what the key points are that lenders look for in a development deal. Having worked with developers for many years, and funded hundreds of projects of all shapes and sizes, there are some key points to be aware of.
Unless you have been living on a desert island recently, we have lived – and continue to – through
times of change and uncertainty.
But what does that mean to funders? Obtaining finance is no longer as easy as knocking on your bank manager’s door, providing title deeds and proof of deposit to receive a good luck slap on the back and a ‘see you in 12 months’, but that can only be a positive.
There is more choice than ever among financiers who can assist, but making sure your project is the one that catches their eye is key.
Most important is a strong development broker. This means one who can understand the integral internal workings of a development scheme, model the financials, work through potential issues pre-submission, know which lenders and to approach for which niches – and that’s all before the credit process has even started.
Development finance lenders are inquisitive by nature, so any inconsistencies or gaps will be questioned – or worse declined. As such, presenting a project summary is essential. Next, location: what does the area look like? Where are the nearest transport links and amenities? Is the development in keeping with the landscape?
It shouldn’t be a surprise that most lenders insist on a site visit prior to final credit sanction. There are no right or wrong answers with location, but having a 360-degree view of the scheme’s surroundings shows attention to detail.
Financials: The two key aspects here are the financials of the scheme itself, and of the parties carrying it out. We don’t need to see a 65-page spreadsheet, but a clear view of each aspect is key to delivering the scheme.
Take into consideration the costs of the land either own or buying, as well as costs to build, including a breakdown of build period and what that means linked to returns and profit.
We spend a lot of time modelling schemes with clients looking at all metrics, not only to make it fundable, but to also advise developers on its viability as a project.
A development appraisal, cost breakdown and build program are key. We also expect a full picture on the principals, which has become more common with lenders who want to understand the full picture.
What are their assets and liabilities? Do they have any credit impairments? What hard cash is invested, or what deposit is available? How many other projects are ongoing? Are the contractors sound and liquid? Where is the equity coming from?
Confidence in Skills
Nothing is a given any more. So, with economic and other external pressures outside of peoples control, can they provide additional resources to put things right if needed?
I can’t count how many times I’ve heard ‘I have a contractor on a fixed price Joint Contracts Tribunal (JCT), so there’s no risk’. Like any element of business finance, lenders want to know that you have the capability and skills to deliver a project and pay them back.
What is the developers working background? What schemes have been completed previously? That includes the professional team. Don’t be afraid to show videos, websites, before and a er pictures, and prices achieved. If you have built single units on your last five projects, why would your next scheme be 30 flats?
Planning and Exit
Planning is extremely important. What conditions are required to be satisfied to start? When does it need to be implemented, graded or listed? Are there overages, ransom strips, easements, or access issues?
Understand all aspects, and if you’re unsure, speak to a professional. A planning issue could cause a severe delays and full planning doesn’t always mean a site is ready to go.
Finally, the exit. Do you have an accommodation schedule, market information and evidence from local agents of sales and values? Sales are where the bank gets its money back and you make a profit, so you’d think this would be one of the obvious points, but often it’s overlooked.
Not each element needs to be a ‘grade A’, but if one area is weaker, we will look to prop up others.
Obtaining development finance is more like a business plan, rather than an application. With lenders available up to 70% loan to gross development value (LTGDV) and 90% loan-to-cost (LTC), with higher gearing through mezzanine and equity, it is still very much obtainable.
Call us today on 02080 579 178, or request a callback here, to see what we can do for you.
(The hard copy of this article is available in The Intermediary edition 3: https://www.paperturn-view.com/?pid=MzE319498)
Article By Tom Lee
April 19th, 2023
Tom is one of the founding members of the company and has been a part of the Pure Group since 2013 playing an integral part of the business’s growth and direction.
He had over 10 years of experience in the real estate financial sector prior to joining Pure with a major bank. Tom has a wealth of experience providing debt advisory on large, complex deal structures for developers and investors across all asset classes, throughout the UK and parts of Europe.
He has built a strong network across the property and finance sector, which enables him to provide a total package solution to his clients and contacts, with whom he has built long standing relationships.
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