Top Ten Tips for raising finance for experienced developers

Top Ten Tips for raising finance for experienced developers

Finding the right products and services for experienced property developers can prove more complicated that it first appears. With a wealth of specialised finance available, it is always.

Finding the right products and services for experienced property developers can prove more complicated than it first appears. With a wealth of specialised finance available, it is always important to know what will suit your client, and which clients will suit you.

Guiding us through the intricacies of catering for more prolific developers, Michael Magee, Owner of commercial and development lender Development Finance Bank, uncovers his top ten tips...

Tip 1: Finding developers who could qualify for mezzanine finance

Talking to your existing clients can yield surprising results. Often, developers will have more than one project on the go at any one time or will be looking at taking on multiple deals. With less cash to contribute on the next project, it’s often these deals that may suit a mezzanine facility.

We talk to developers every week who have never considered mezzanine finance - partly due to misconceived ideas about the cost - yet when they understand the extra capacity it can offer them, they start to realise the value in exploring this type of funding further.

It may seem obvious, but a simple call to your existing developer client base to find out how their projects are progressing and a few probing questions about the level of debt needed for their next project will near-guarantee

Tip 2: Questions to assess whether your developer could use mezzanine finance

Ideally, there are several questions that should be asked of any potential developer before you can assess how appropriate mezzanine finance might be for them, namely:

• Are you seeing evidence of good quality deals that you could develop if you had the funding?

• Do you feel you are losing out on opportunities that show good returns (i.e. 25 per cent or more)?

• Which other senior lenders are you talking to, other than those I’m already aware of?

• Do you have some of your own cash – ideally between 10 and 15 per cent - to contribute to the next project?

If the answers to the previous questions are positive, I would then say mezzanine finance - or ‘top-up’ funding - might be something that they should consider for their next development.

Tip 3: Getting a client’s basic details clear

When approaching a development lender, it’s good to get a client’s basic details clear in your mind and in a format that can be presented to the lender in a clean and simple document.

Most lenders can give a good idea of their potential appetite towards a deal with the following details. Keep in mind that although this list is preferred, obtaining this information is not absolutely necessary to get indicative terms:

• Developer experience, in the form of a CV. A client will be expected to provide both photos of previous projects and figures pertaining to sales, purchase price and build costs.

• Location of the new project and the type of property to be developed. Providing the floor area of the units can be useful.

• Construction costs, broken down into constituent parts, including fees and professional costs.

• Expected GDV (Gross Development Value) with, if possible, comparable evidence from local agents.

• Link to planning permissions on the local council’s website or, if available, a copy of the planning document.

• A development appraisal from the developer. Most will be able to provide you with a spread sheet.

Tip 4: Arrange a meeting

Having submitted a development proposal to a lender, the next stage will be to arrange a meeting between the borrower and the lender. This may be at the site’s location or in the lender’s offices. Ideally the lender will want to visit a few of the developer’s previous projects to get a feel for what they have completed in the area.

Compile all the relevant paperwork that you can – such as plans, drawings, photos of previous sites, comparable evidence accounts, buildings costs and cash-flows - and bring them to the meeting. It is both helpful to have as much info as possible to hand and creates a good first impression.

This meeting provides an opportunity for the lender and client to get to know each other and decide if they can work together. We like to meet with a client for a couple of hours to fully understand their business and experience, so keep this in mind when booking appointments.

Tip 5: Writing the credit paper

After the initial meeting, if the lender is satisfied with the information provided and the client wants to proceed, a credit paper will be written up and submitted to the lender’s credit committee who will decide if they can provide the funding requested. In a successful application, the broker can request to receive a written offer and set of terms: use this as an opportunity to go through these carefully with the developer and, should they feel they need further comfort, they may want to consult their solicitor. This may even be a requirement of the offer if additional security involves the matrimonial home.

It’s at this stage the developer starts to have to have costs towards the set-up of the facility and your role as a broker goes from finding the finance to helping gather all the relevant paperwork required by the lender to satisfy the conditions of the offer. I believe this is where brokers can offer more value and support the developer in gathering this information as quickly as possible.

Tip 6: Thinking Legally

Congratulations, the credit committee has approved your credit paper and it is now all about getting the legal work completed!

The lender will start its due diligence on the client - which is the formal verification of everything discussed to date. As for surveyors, monitoring surveyors and solicitors will be appointed. It is now the client's turn to start to pay for fees towards reports, which will back up values and expected build costs.

It is good practice for the broker to make sure that surveyors are booked in as quickly as possible and that, once they have been to the development site, reports are completed within reasonable timescales. As a broker, it is wise to know how this part of the deal is going: talk to the surveyor about expected dates for the report and make a note in your diary to call when due.

Remember: if the client is buying the site, the deal is not done until the money is in the vendors account! Keep pushing the deal along at every stage. It's what the professional brokers do to guarantee a high success rate of closed deals.

Tip 7: Insurance

When structuring finance for a developer, it is wise to talk to them about building insurance. All lenders require that an existing building must be insured by its owner against fire and all comprehensive perils. Surveyors may also require insurance protecting against additional dangers. The sum insured is set following a valuer’s suggestion and will be under the joint names of the legal owners. The lender’s interest needs to be noted on the policy as mortgagees.

The developer will also require insurances in relation to any building works - these will need to be in place prior to drawdowns - such as a contractor’s “All Risks” policy, which covers the contractor’s building works, and, of course, Professional Indemnity cover for both the architect and engineer. Talking to the developer about these requirements will save time and potentially present you with an opportunity to earn a commission from the insurance provider.

Tip 8: Comparable Evidence

Development finance lenders have many concerns when deciding on where to lend their money and one of the biggest issues is the issue of sales. Will the flats sell for £400 psf or £500 psf, are the houses right for the street ?

To get comfortable with the proposed project, lenders spend a lot of time working on comparable evidence for units that have sold locally. All lenders will do their own due diligence on this, however it will help if this information can be presented as part of the pack. Prepare a spreadsheet with the address of the comparable sites, list advantages and disadvantages such as noisy road, parking, long walk to the tube station etc., list the unit values, area sqft and work out the pound per square foot (psf), has it sold or is it under offer and any other interesting notes. Linking to the agent's website or the developer's website is also very useful as are photos of the developments. Take the time to produce this, stand out from the crowd and greatly increase your clients funding potential.

Tip 9: Keeping your options open

I believe that development funding is about having options open for your clients. Talk to your lenders about their criteria and establish who will lend up to 90 per cent, who will lend against flats outside of London and who won’t. Get to know lenders’ rates and pricing structures.

I’ve found that developers will call a number of brokers initially, though once they have someone who they feel understands the market and the range of options available will stick with that broker. Development finance is a growing market: the high street lenders are still very cautious and this creates a fantastic opportunity for brokers to offer developers a quality intermediary service and, crucially, charge for it!

Tip 10: Completion

Completion dates are usually established by the buyer and seller, giving all parties a deadline date to aim for. However, in some situations completion is determined by the needs of the client and, therefore, the date can be more flexible. Lenders and their professionals understand this and are able to preform to very tight deadlines, though it is usually the client's solicitor who dictates the speed of completion; it's worth making sure that your client is represented by a specialist property lawyer.

The lender's solicitors will submit their report on title with instructions for the transfer of monies on completion. Make sure at this point that your client's solicitor has allowed for all disbursements; it is not uncommon for completions to be held up because the client did not have sufficient funds to meet all the costs. This can cause major issues, especially when there is a long chain.

Remember, though every transaction is different and you will always be learning, development finance doesn't have to be just for the specialist commercial brokers.


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