Fair Rents (Scotland) Bill or Artificial state manipulation of free market rent?10:34 AM, 6th November 2020
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We are witnessing a significant rise in the incidence of some banks refusal to offer new or extended terms to development loan facilities. In extreme cases, some banks are demanding early loan redemption. This often leaves the borrower with a major headache in a market where commercial lending is restricted and competitive alternatives are not immediately apparent.
There is no doubt that some banks are ‘shoring up’ their liquidity positions by not lending as broadly as they have done in the past, but there are still a good number lenders very much in the market.
The skill is to source those lenders who have an appetite to lend. In addition, to present a proposition in a robust manner and, importantly, directing the proposal to the underwriters making the decisions, rather than the local branch manager who probably has no discretion in these matters.
It is also important to direct an enquiry to those lenders most likely to be in a position to assist. This is not a ‘one size fits all’ market and it is important to direct the enquiry to the most appropriate source.
High Street Lenders
The high street lenders remain open for business for the right deals and will offer the best rates. By way of example, we were able to engage a high street lender to support a residential development at 3.75% over 3 month LIBOR, loan serviced on a quarterly basis. The client required an 18 month facility to build five four-bed executive style homes in Essex, land cost £1.65m, build costs £2.1m and final gross development value 5.5m. As an experienced developer, we were able arrange a loan facility of 65% of land costs and 60% of build costs.
It’s important to understand the high street lender criteria. The applicant must be able to demonstrate relevant experience, not just transactional. So, if the proposed project is to construct a block of flats, the lender will look for a successful, comparable track record – delivered on time, within budget and a timely exit strategy. In addition, there needs to be evidence of the ability to service the loan. Often the lender will want funds deposited with them to cover the serviceability aspect. Most high street lenders are now stipulating an exit fee based on the facility amount, typically 1%, too.
Merchant Banks and Specialist lenders
Merchant banks and specialist development lenders offer a wide range of facilities from a maximum of 75% Loan to Value. It is important that offers are scrutinised closely to ensure an understanding of the ‘whole’ cost of the loan. For example, a low headline rate might not be the most cost effective if an exit fee is based on the gross development value, whereas a higher headline rate from a lender with no exit fee could be more cost effective.
Some of the smaller lenders offer facilities to the smaller scale developer with perhaps less experience. Typically the rates will be higher than the high street lenders, but these lenders can provide a fast and effective route to finance. The rates and terms are wide and varied. For example, we have experience of arranging loans with rates from as low as 0.7% per month up to 1.5% per month. The lender will carry out a risk profile of the loan proposal and will price accordingly. Geographical location of the project is also an essential consideration. Some lenders will support only those proposals in a defined geographical area. On a positive note, having a local lender supporting your finance requirements and understanding the local property market can be a big plus point in securing the right terms.
Calculating the loan cost
It is important to calculate the whole loan costs:
– How much is the arrangement fee? Can it be added to the loan?
– How is the interest calculated? Rolled up into the loan, deducted from the gross loan or does it need to be serviced on a periodic basis?
– Is there an exit fee? Not all lenders impose this charge. How is it calculated? Based on the loan amount or the final gross development value?
– What additional costs should be considered? Valuation, re-inspection and legal fees. Will the lender insist on the appointment of specialist surveyors to carry out detailed monitoring of the project, the cost of which will be significant, as opposed to a simple re-inspection before each drawdown is required?
Mezzanine finance is readily available and terms are becoming more competitive. Rates vary for second charges, but can be particularly appealing to developers who already have a relatively cheap facility in place from their principal lender.
There is no doubt that development finance is more expensive than the ‘traditional’ sources of secured loans. The banks have learnt a lot from the boom and bust years and are approaching the current development loans market in a much more prudent manner and their due diligence and stress testing is more focused than it previously was. However, developers should not be put off by the seemingly difficult route to finance or the perception that the associated costs will be prohibitive. Costs are relative; if a developer can demonstrate a significant profit margin on the deal, there could well be a case for looking at the finance costs objectively and pricing them accordingly. The opportunity cost of not pursuing the development may far outweigh the cost of the finance package.
We have witnessed some quite amazing proposals from clients who have identified significant opportunities to either rescue a previously failed development project or to create their own vision of a project. We also know that no two propositions are the same, each having their own unique profiles. It is this uniqueness that needs to be addressed by a qualified, experienced broker that can identify precisely what the client’s requirements are and the best possible financial support available.
If you would like some assistance yourself or just have a chat about a potential project, please click on the appropriate link below or call us on 01603 489118.
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