With over a decade in development finance, Vantage Private Finance are industry experts and in this article, give valuable insider knowledge on how to make the most of your application and increase your chances of obtaining the development finance you are looking for…
What is development finance?
Development finance covers everything from smaller refurbishment projects, right through to new build schemes starting from the ground up. It allows developers to borrow against the initial purchase and against the build costs in most cases, although the structure and phasing of the loan is discussed at the beginning of the finance process to establish the needs and requirements of the developer.
What size of project is development finance usually suitable for?
Funding is available for projects of all sizes but catered for through many different funders, each with their own preferred criteria. Some will have a larger minimum loan (at say £500/750k) but will lend on new build schemes with £30m+ GDV’s, where others might prefer smaller loans (at say £300k) with a maximum loan of just £1m. Different lenders have different restrictions in place, with some restricting lending on high value single dwellings and others not liking large numbers of units (due to concentration risks), but in the main there is a lender out there for most viable projects.
CEO of Vantage Private Finance Lucy Hodge talks us through the most common type of applications they see…
“We see a huge range of projects which makes development finance all the more interesting. Most of what we do is around the £2m+ mark but that’s when the projects are in and around London and the South East. We have seen a lot of luxury houses and apartments in London and surrounding areas with unit values of £2.5m plus which can be tricky to place.”
Lenders will usually want to see experience of similar projects by the developer or at the very least the contractor, and the options available to anyone looking to obtain development finance will reduce when this is not the case. In varying degrees, a funder will want a developer to have ‘skin in the game’ whether that is just 10% of total costs or 40% of total costs. The more cash the developer is prepared to put in, the better the offer from the lender (usually subject to other caveats). Personal guarantees are taken in all cases and a lender will be looking to understand the net worth of the individual providing the personal guarantee through their Asset & Liability, so full transparency is necessary. There are however, some lenders who will lend to credit impaired applicants provided the rest of the deal stacks up well.
What do you need to prepare in advance before you apply for development finance?
It is essential to prepare asset and liability (A&L), planning permission with full details of the project (including plans, elevations and drawings, comparable evidence and details of the target market to support the end values (gross development value – GDV), detailed development appraisal and cash flow forecast). It’s also vital to provide a CV for the developer showcasing their experience alongside details of the contractor including their previous relevant experience on similar projects.
Is there anything you can do to improve your chances of a successful application?
Do your homework on the GDV making sure the numbers are realistic if not conservative and run a proper tender process with several reputable established builders. Spend the time putting together the paperwork (especially the developer CV and background experience) as presentation is key.
• What are the main reasons applications for development finance are turned down?
Applications for development finance are commonly turned down for the following reasons… valuations coming in lower than clients’ expectations, build costs being quoted too low and the quantity surveyor not supporting the estimated costs, lack of experience from the developer, using an inexperienced contractor who may be seen as high risk, and projects involving quirky or unusual properties.
Lucy goes on to explain why she believes applications for development finance sometimes fail…
“We find that due to the speculative nature of development we see much more opportunities from our developer clients than any other product but the reality is that many of those projects do not end up going through because either they don’t stack up or the deal simply never comes off. Most of our developers have had bad experiences in the past when trying to raise finance and in many instances the main reason they end up coming to us is that their existing lender or Bank does not give them the support they need. We open the door to a number of lenders and this saves them a lot of time and energy.”
For more advice on obtaining development finance for your next project visit our Finance Forum here where our Lucy and her team from Vantage Private Finance are always available to answer your questions. Or contact them through directly through their website here.