Funding a development project in London can be tricky, especially for first-time developers. With hundreds of lenders in the market, each offering their own products. While there is no silver bullet when it comes to obtaining development finance, there are some common errors that can be avoided when approaching lenders:
Overstating GDV: The gross development value or GDV is a key figure on which the lenders will base their lending terms. For example, lenders may lend up to a maximum of 75% loan to GDV, meaning their loan will not exceed 75% of the GDV. With this in mind, an accurate GDV estimate is essential to ensuring a successful loan application. Instances where the developer overestimates the GDV often result in the loan application being declined or the loan amount being reduced. Lenders will confirm the GDV estimated against the valuer and monitoring surveyors opinions to ensure that they are accurate.
Planning Risk: Planning applications take a long time and can have unpredictable outcomes, especially in London. With this in mind, most development finance lenders will not take planning risk. This means that they will not approve applications where planning is not in place yet. In these instances, borrowers commonly take out a bridging loan until planning has been approved. Once planning has been approved they will refinance onto a development finance facility.
Lack of Suitable Experience: When evaluating a loan application, development finance lenders will scrutinize the borrowers development experience on similar projects. Most lenders will not lend to developers with little to no experience as they are deemed as risky borrowers. With this in mind it is important to fully evidence any development experience you might have prior to your loan application, if suitable experience cannot be evidenced some borrowers choose to partner up with experienced developers. While it is seen as more risky, it is still common for lenders to lend to developers with no experience, although they will require that the developer appoints a highly skilled professional team for the project.
Equity Contribution: Borrowers should ensure that they have their equity contribution in place prior to any loan applications. While some lenders might require a reduced equity contribution, it is impossible to find a lender who will fund the full development without an equity contribution from the borrower. In cases where a borrower does not have a sufficient equity contribution, they can source equity from other investors in order to reach the required equity contribution.
Choice of Contractor: The right contractor can make or break a development, especially in London, where logistics can be tricky. When applying for development finance, lenders will heavily scrutinize the contractor, analyzing their experience, financials and professional team. Poorly skilled contractors or contractors with cash flow problems will not meet lender’s minimum requirements and may be a significant contributor to a declined loan application.
Poorly Planned Exit: In order to repay a development finance facility, borrowers generally rely on the sale of refinance of the development. In the instance of sale, development finance lenders will want to see sufficient demand for the completed property in order to ensure that the property can be sold upon completion. In the instance of refinance, lenders will require that the property is in a mortgageable state post-completion.
Valuation: The property valuation is equally important as the GDV estimate. Where the GDV estimates the value of the completed development, the property valuation estimated the value of the property in its current state (prior to commencement of the works). The valuation is commissioned by the lender at the cost of the borrower and is used to gauge the value of the property, ensuring it can act as sufficient security. The primary reason for this is that lenders are constrained to a maximum day one loan to value (usually 75%), that cannot be exceeded.
Timing: The timing of the development is crucial to its success. Well-timed developments will have an efficient construction period followed by a short sale period. It is important that the borrower begins sourcing development finance early enough to ensure that they have sufficient time to acquire the required finance. Experience developers should be able to adequately estimate the rough timeline of the development, including contingencies for potential delays.
Development Finance Broker: Even the most experienced developers use development finance brokers for their projects. While there are a number of reasons for this, the primary one is that development finance brokers have completed hundreds of development finance applications. Development finance brokers are able to leverage this industry experience to ensure that their clients have access to the best product from the best lenders.
In conclusion, there are a number of ways in which London developers can reduce their exposure to risk, increasing their ability to source development finance from a 3rd party lender. With this in mind, having a skilled development finance broker, such as Silver Oak Capital, can maximize your chances of a successful application.
