11:12 AM, 2nd August 2012, About 9 years ago
Many high street banks are still refusing to offer new or extended terms to development finance facilities and those that are still in the market are offering increasingly stricter terms with the introduction of exit fees, increased rates and an insistence that the loan is serviced on at least a quarterly basis. 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.
As a direct consequence, the void is being filled with dedicated development finance lenders and new entrants to the market. This is good news for borrowers as the competition starts to drive down rates and fees.
However, not all that glistens is gold and it’s important that prospective borrowers understand the terms that are being offered. A generous head-line rate might mask a sting in the tail with a hefty exit fee.
Most borrowers understand the lender’s need to profile the risk of this type of lending and charge accordingly. A rate of 1% per month is often considered reasonable in the current climate, but not all borrowers understand exit fees, especially those based on the gross development value of the build.
We are working with a new entrant to the development market. A long established and traditional lender that recognises that a good development project carried out by a seasoned developer deserves an attractive rate. They have also recognised that the headline rate should reflect the risk without the need for exit fees and will also consider bridging facilities for residential properties. The lender will only accept business from a panel of brokers and we are privileged to be one of them.
Below are some examples of deals that we have put together for clients:
1. Residential development of 2 x 3 bed semi-detached houses.
Unencumbered plot worth £130k, development costs £100k, GDV £450k.
A facility of £165k (50% land & 100% costs) for 12 months was arranged at 9.99% (0.83% per month) with the client servicing the loan on a monthly basis.
Arrangement Fee 2% (added to loan).
Exit Fee – nil.
No ERC’s, minimum term 1 month.
2. Residential development of 4 units utilising existing farm buildings
Purchase price £275k, development costs £750k, GDV £1.55m
Collateral security £200k
A net loan facility of £887.5k (50% build, 100% costs) was arranged over 12 months at 10.7% (0.89% per month). Gross loan calculated to incorporate 12 months interest.
Arrangement fee 2% (added to loan).
Exit Fee – nil.
No ERC’s and ‘unused’ interest credited to the loan balance.
3. Residential Bridge, 3 storey property to be converted into 3 flats.
Purchase price £165k, conversion costs £55k, GDV £275k
A 6 month facility of £135k was arranged at 10.7%. Client servicing monthly interest.
Arrangement Fee 2% (added to the loan.
Exit Fee – nil.
This particular lender does not insist on expensive monitoring surveyors during the build period. After the initial valuation and before each draw down, an inexpensive re-inspection is all that is required.
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 costs objectively and absorbing them as part of the legitimate (and tax allowable) costs of the project. 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.
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