When is a lender not a lender?

You are a potential borrower looking for a development loan. You have a clean credit history, good experience, substantial capital and a viable project so it will be easy to raise development finance with security on your project, right?

Wrong.

There are many active ‘lenders’ if you listen to what you are being told, but how many of them will actually provide funds for a project when it comes to the crunch? We hear of cases on a daily basis where borrowers have been told that funds will be available for their project but when the funds are actually needed a mysterious reason comes to light why they cannot be advanced.

This is turning into something of an issue, which I can highlight with the following case studies:

Case study one:

A pair of very experienced developers, Mr and Mrs D from Hampshire, approached a mainstream clearing bank to borrow £150,000 to convert a house they bought for £1m of their own funds, with no borrowing.

The GDV was close to £2m so they were, in effect, looking for less than 10% (yes 10%) LTV. The bank assured them this would not be a problem, but the troubles began when the lender’s surveyor inspected... On receiving his report the lender decided this was no longer a suitable proposition, why? Because there was no kitchen in the property! Why was there no kitchen? Because the walls were yet to be plastered and clearly in a development project the kitchen will come in at the appropriate time. By contrast, they then came to us and received their funds within a week of signing an offer.

Case study two:

Another very experienced developer, Mr M from Hampshire, approached his mainstream clearing bank that had been lending to him for his development projects for over 30 years. He was buying a site for over £500,000 with his own funds and he needed £400,000 to construct a substantial house, the GDV was around £1.5m, so he was looking for funding of around 26% LTV. The bank initially confirmed the funding but during the diligence process it realised a ‘major’ problem which they could not possibly overcome. The ‘major’ problem? He had just turned 61 years old, and his bank has decided that to obtain funds for a 12 month project the borrower now needs to be 60 or under...

Excuses not to lend

There are countless more examples of lenders coming up with spurious reasons why straightforward, secure projects can not be funded.

The fact of the matter is the banking crisis has led to a number of mainstream banks having too much property or construction exposure on their books and they are no longer allowed to lend to the property or construction sectors until their books are re-balanced.

The obvious question therefore is why don’t they just tell their clients they are no longer lending and save a lot of wasted time asking questions which they know will not lead to funding being provided? The answer is simple, they do not want to lose face and admit they are a lender that cannot lend, if they tell you that then what is their purpose?

The current situation reminds me of a sign I once saw in my local dry cleaner when I was a child, it had a picture of three elderly people and beneath the picture it read: “We only offer credit if you are aged over 90 and are accompanied by both parents”!

A similar poster could be put up in a number of lenders’ premises today; as it is clear the lending market has many lenders who cannot lend to anyone who actually needs it.

James Bloom – Regentsmead Limited

020 8952 1414