Top Mistakes to Avoid When Applying for Property Development Lending

Securing the right development finance is a crucial part of any development project, from refurbishments to multi-unit ground up developments. In fact, most developers rely heavily on development finance to fund their developments. Given the importance of development finance, it is vital that developers ensure their application for development finance is successful. This article, we will outline some of the common mistakes made when applying for development finance, ensuring that developers know what to avoid in their development finance application.

1. Underestimating Total Project Costs

Perhaps one of the most common errors that developers make is failing to accurately estimate their project costs. Developers should ensure that they are able to accurately estimate the land value, construction costs and professional fees of their project, prior to commencement. Apart from the fact that their cost estimation is crucial to the success of their development, it is also an important factor on which lenders base their lending decisions. Inaccurate estimation of project costs is likely to confuse lenders, making you look inexperienced and unrealistic. Furthermore, these costs will be verified by means of a valuation report and a monitoring surveyor, and so any mistakes will certainly be picked up on. While experienced developers may have no issues estimating costs, inexperienced developers should consult with professionals like architects, quantity surveyors and contractors in order to ensure that their figures are accurate. Furthermore, by factoring in a healthy contingency (generally 5-15%) developers can ensure that they are adequately protected should the development run over budget.

2. Not Having a Clear Exit Strategy

Another common error property developers make when applying for development finance is failing to provide a clear, certain exit strategy. When making a lending decision, development lenders are likely to place great importance on the borrower’s exit strategy, as this will determine when and how they are repaid. There are a few common exit strategies that are widely accepted by lenders:

• Once the development is complete, the developer will sell the development to repay the development lender
• Upon completion of the project, the development loan will be refinanced into another loan, generally a longer term mortgage or bridging loan (development exit loan).
• Repayment of the loan from cash from the completion of other projects.

While the above exit strategies are widely accepted, there is no guarantee that the lender will evaluate each application on a case by case basis. One way in which developers can ensure that their exit strategy is clear is by having a well-researched, accurate proposal on their exit strategy, giving confidence to the lender that they are relying on a certain, defined exit.

3. Inadequate Experience or Team

When evaluating an application for development finance, lenders will place a great importance on the experience of the borrower. Even if the project is low risk, lenders prefer to lend to a borrower who has embarked on similar projects. While some lenders are happy to lend to inexperienced developers, they will still require that the developer has an experienced team around them, this includes architects, contractors and surveyors. When applying for development finance, it is important to highlight your previous development experience and ensure that you are employing a strong team of professionals around you.

4. Weak Planning or Permissions

While this may seem obvious, it is a very common mistake made by borrowers. Development finance lenders will generally require that planning is in place prior to drawdown. One of the reasons for this is that lenders do not want to take on planning risk, as it can be tricky to get planning for certain projects. In order to avoid a declined application it is important to ensure you have achieved planning approval for your project prior to approaching any lenders.

5. Inadequate Cash Contribution

Another important consideration for development finance lenders is whether the developer’s equity contribution is sufficient. There are a number of reasons for this. Firstly, lenders want to see that the developer has sufficient funds to fund a portion of the works, as this demonstrates overall financial health. Secondly, lenders prefer it when the developer has their own money invested in the project as it illustrates their commitment to the success of the project. In order to ensure that your equity contribution is sufficient, it is important to consult the lender’s product criteria, which will outline the necessary equity contribution you will be required to make to the project.

Conclusion

In conclusion, securing the right development finance can be a tricky process, with a number of different factors to consider. In order to ensure that your application is successful you should familiarise yourself with the common mistakes mentioned in this article and avoid them at all costs. In doing this, you can maximise your chance of accessing development finance.