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May 2019


Why Transparency is key to a Successful Development Finance Offering

By Opinion
I sometimes find it a bit of a cliché when lenders chant the mantra of ‘the devil being in the detail’.

This is of course completely true when it comes to underwriting a new loan, but this is also easier said than done. Is there something us as lenders can be doing to help a property developer client be as profitable as possible?

When we first look at a new development finance proposal, one thing that’s for certain is that the costs we are presented with on day one are unlikely to be completely accurate. Some expenses will be missed, delays will happen and ultimately a developer’s costs at the end of the project will often be some way away from the initial appraisal received. With the full effects of Brexit on building costs not fully known at this point, it’s more important than ever for developers to make sure that their costs are as accurate as they can be. One area I find that is often overlooked is the cost of development finance, and I believe that lenders should be doing more to be completely transparent about what the cost of funding will be to a developer client from day one, and what this means for their bottom line. This includes being completely clear about hidden costs, such as extension fees, admin charges or any other unfortunate ‘extras’ that I’ve seen pop up in some loan agreements.

The beauty of development finance is that there is more than one way to skin a cat. Every lender approaches development funding differently and more choice can only be a good thing for our market. I do, however, find it slightly disconcerting when a client chooses to go with another lender on the basis that their offering is ‘cheaper’ despite the lender not being fully open about other charges that may not initially be declared. Sadly, it happens all too often.

Our industry has come a long way over the last decade. Reputationally we are wonderfully positioned compared to where we were when I joined the industry in 2012.

It is though, essential that we continue to improve our standards, which includes being completely honest, open and transparent about the way we charge our customers.

At Magnet Capital we thrive on repeat business, with both our broker partners and developer clients. One of the reasons this is the case is because by being transparent on day one, our clients can pinpoint as accurately as possible where their profit will sit come the end of their project. Fewer nasty surprises for a client at the end of a facility term means a much more likely chance of developing a genuine and successful long-term relationship. Trying to predict where the market will be in 12 months, along with fluctuating costs, is making property developer’s jobs harder than ever, and it is therefore our role as lenders to help them as much as we can.


A Guide: What information do I need to provide for development finance?

By Blog, Development Finance

If you are looking to apply for development finance in order to be able to fund a building project, then it is important that you prepare as much as possible before making your application.

There are a variety of things that you should be taking into consideration, so that you can carefully plan the application that you make, and in order to ensure that getting a development finance loan is the right option for you. We take you through the information that you will need to provide, as well as overall lending criteria for development finance.


Lending criteria for development finance

It is important to keep in mind that development finance lenders will usually consider application on a case-by-case basis. However, it is still important to keep the following points in mind too:

  • Term of loan: this will usually be between 6 and 18 months in total. Some lenders may be more flexible with the terms of a development finance loan, but you will usually find it is a period of 12 to 18 months without any penalties for paying the loan earlier than anticipated.
  • Loan to value maximum: this will usually be in the region of a maximum of 55% of GDV.  The lender will consider how much you are wanting to borrow as a percentage of the gross development value of the completed project. The maximum loan value that you can receive based on GDV is usually 55% but it can be higher.
  • Experience: the level of experience of the property developer will also be important.
  • Security offered: the building or site offered as security must be suitable
  • Location of the development: the location of the site or building will also be taken into consideration.
  • Feasibility of the project: the lender must believe that the project you intend to carry out is feasible. If they have too many concerns, your application could be rejected outright.

What information is needed for a development loan application?

In terms of the information that you will need to provide to a lender when applying for a development finance loan, you will find that you will require these details:

  • Details of the site or building: this includes the value, location and the price of the site or property
  • Development costs
  • Development appraisal
  • Planning permission details: what you are intending to build and what permission you have already for the site
  • Gross Development Value details: this includes providing evidence of the expected end value to the lender.
  • The details of all applicants involved. If you are a limited company then the directors details will all be required too. This includes the history of previous developments carried out, how successful they were, their CVs, and project profits from previous developments.
  • Who the main contractor will be
  • Who will be the project manager for the development finance project
  • Company structure
  • Asset and liability statement for the company directors or applicants involved


What paperwork will I need to provide?

Other important items you will need to provide include:

  • A detailed breakdown of all project costs
  • All designs and drawings of the project
  • Planning permission details and applications
  • A complete schedule of works for the project
  • Details of professionals involved in the project
  • Details of your previous development experience
  • A completed Asset, Liability, Income and Expenditure Summary (ALIE)
  • A planned exit strategy for the project being carried out

A Guide: How funds are transferred in development finance

By Blog, Development Finance

Development finance loans can make a fundamental difference to the process of renovating for property developers, helping to provide cash flow so that the work can be completed in the most efficient way possible, without having to worry about how the project will be financed, also helping to reduce potential stress.

However, if it is the very first time that you have applied for development finance, you may well be wondering as to how the funds are transferred, and how the overall process works.

In this guide, we will explain in detail exactly how the funds are transferred in different stages over the course of a building project.


Why is development finance given in stages?

It is important to remember that development finance loans are always released in stages through a number of payments. This is because development finance lenders want to ensure that the loan given is proportionate to the value of the work being carried out.

It is also to make sure that the loan is being used under the conditions initially agreed on by the two parties concerned.


Securing the purchase

The first stage of development finance funding will typically involve securing the site. The lender will usually provide an agreed set amount upfront, so that you the buyer are able to complete the purchase of a property.

Whilst the exact amount that is provided upfront will often be dependent on the development finance product that you choose, you can usually expect this to be somewhere in the region of 40% to 50% of the current valuation of the site.

From this aforementioned figure, charges and interest will be deducted, which will then leave you with the net development finance loan.


Payments in stages

Throughout the course of the build, payments will be released in stages by the lender. This is to help you to continue working on the building project. Payments are released once the current work has been signed off by a monitoring surveyor.

The surveyor in question is instructed by the development finance lender to manage the site and work, in order to ensure that everything is on track with the project.

Typically, the monitoring surveyor will carry out checks to ensure payments are released.These include checking that the work has been completed and meeting the terms and conditions of the loan itself.

This includes abiding by the agreed upon build schedule, as well as cost management and ensuring that the quality of the work carried out is to a high standard.

If the monitoring surveyor finds any discrepancies during the building project, compared to the agreed upon plan, then it is possible that the stage payments for development finance could be delayed.


Cash flow management

One of the great things about development finance is that it enables you to keep the cash flowing throughout a building project. Make sure that you follow the work schedule, as well as keeping a cash flow forecast to ensure the project runs smoothly.


Accuracy of building schedule

When it comes to development finance and cash flow, it is extremely important that your costings and build schedule is accurate in order to keep everything on track.

This is important, as whilst lenders will usually be happy to release equal amounts each month, you could find some months more expensive than others.