#SQFT 13: Why debt lenders say no to property developers – 8 steps to make funding easier

With every deal appraisal we see at SquareFoot Capital – there is an opportunity for financial engineering; making your deal more profitable or de-risked by correct structuring of a spreadsheet. Typically, this results is easier debt lending and at a lower cost – so more profit to you.

Despite the property market being on its knees at the bottom of a cycle we are seeing more opportunistic debt lenders enter the market. Why? Because the economy is atb an all time high and we are currently experiencing one of the longest bull runs in history – which leads to more money needing a home with a safe return – commonly know as the debt markets. So with more debt lenders, competition arises, rates go down and more options open up to the developer. However, all high quality debt lenders have strict criteria they must hit in order to make a loan – and so many developers do not deliver this meaning refusals and lending being taken from poorer (more expensive lenders) with weaker lending criteria.

So what do debt lenders require from you? From their perspective, the need to protect their principle, reduce any risk to themselves of losses, have a predictabvle outcome allowing them to raise more money from their investors. It is commonly thought that many debt lenders are a huge bank account which they are not – all debt lenders have to raise money themselves on which they have to pay a return so in order to take a higher return from borrowers (property developers), they need to protect their loans to prevent default.

Any debt lender or bank will have to process all deals through a credit panel for sanction – which is commonly a board of directors and shareholders of the lender and their investors. Therefore, the easier they can present your deal, the easier it is to get a yes. Only a fraction of developmnet deals that lenders recevie actually get sanction – so here is how to give your deal the best chance, first time around.

Presentation – for god’s sake, make your deal appraisal clear and easy to understand in seconds. If a lender is seeing hundreds of these a month, how do you make yours the tope of the pile?

Spreadsheet – ensure this is clearly laid out, same font, sums are all correct, systematic (i.e. costs shown clearly in build up, exit value, profit).

Supporting information – you know your deal / site, the lender does. Give some headline information about the deal – where is it, what is it, why is it profitable, who will buy it. Make this summary short and easy to read.

Visuals – one picture or plan will set you apart so include it. A set of numbers is hypothetical but we are all visual cvreaturtes and need to attach it to something. For example, a CGI of a completed project shows an appealing end result on which to look at numbers.

Experience – if the lender does not know you or not actually lent to you before, show them straight away that you have experience. List your previous deals, the onwing companies, the costs and profitability (or loss, don’t be afraid to show this) and provide a list of your professional team (architect, designers, surveyors, QS etc.) – this gives huge comfort in the abiulity of the developer.

Detail – An initial appraisal should be high level, more detail can follow but let your appraisal spreadsheet clearly show the following data:

  • Land / purchase costs.
  • Acquisition costs (SDLT, fees).
  • Development cost summary (build plus VAT).
  • Profesional fees (surveyors, monitors, banks valuers etc).
  • Disposal costs (agents fees, legal fees).
  • Gross Development costs (pre-debt).
  • Your expectation of debt costs (fees, margins, drawdown schedules).
  • Your Gross Development Cost / Capital Expenditure (CAPEX).
  • Your GDV.
  • Profit.
  • Profit on Cost (not GDV).

Supportive information – you know you market (hopefully) so show that you do. Without solid comparable evidence, you are asking a debt lender to carry out a lot of background research on your behalf, which they likely won’t because you conld not be bothered to. Show you GDV is reasonable and show that unlike EVERY other developer, you are not being optimistic. We all know that our development will be the best thing to hit the market so show you can sell it on a bad day and make a good profit. You will get pulled apart on this and look like an idiot when they say “sorry but…”

Plan and downside protection – if your deal shows a healthy profit with realisitc costs, show that you are considering the downsides.

  • Have you shown a constingency? 5% looks token, 20% shows our deal can handle an overspend.
  • Show what happens to profit if the market / your GDV goes down 10%. If this makes a loss, you are being an hopeful optimist. Hope is not a strategy here.
  • Show your headline metrics – you average sales cost per sqft, your buiuld cost per sqft, the profit erosion (i.e. how many months oif debt payment would there be before your profit goes to zero.

This story is listed in: London Property market, Property development, Property Investment, Uncategorised

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