It can often seem like a complex process, but once learned, Alternative argues brokers will generate meaningful sized loans and significant commissions.
- Find out what individual lenders prefer and match that to enquiries received. The knowledge bank needed is considerable, but there are fundamentals. For example, most lenders have minimum and maximum loans and some have geographical boundaries, a limit to the number of homes in any one project and perhaps a preference for houses over flats.
- Loan to cost is a starting place and whereas the mainstream banks will indicate a loan of 60% of cost, in the secondary markets it can be up to 80% providing the total loan does not exceed 65% of sales or gross development value (GDV). If some of the homes have been pre-sold, loan to gross development value (LTGDV) may be massaged upwards or, if the developer’s skills are relatively untested, the LTGDV may be reduced.
- After the maximum loan is calculated, the lender will apply it first to the cost of construction and interest, and the surplus towards payment for the site and associated costs. The rest is funded by the developer’s equity. No lender wants to end up with partly built homes when the developer’s equity has been consumed.
- Phone the lender to establish their appetite for any loan, but then present a well-researched proposal. Complete the lender’s development finance application form and provide supporting information such as an appraisal and cash flow forecast, detailed plans of the project, a copy of the planning permission and Section 106 Agreement (legal agreement between local authority and developer) and details of the development team, eg architects, quantity surveyor, engineer and the proposed contractor.
- Investigate and report the construction process. Will there be a main contractor at a fixed price or will the developer assemble a group of sub-contractors and self-manage the construction process? Both can be acceptable, but a fixed-price Joint Contracts Tribunal (JCT) contract will always be preferred. Expect the lender to instruct a quantity surveyor to review the costs and process and then to monitor progress and authorise the release of stage payments.
- Be aware that pricing for loans comprises two or three elements. Usually, first an arrangement fee calculated at approximately 1% of the total loan, then interest computed on the monthly balance outstanding, usually at between 0.8% and 1% per month. Often interest can be accrued within the facility limit. Finally, most lenders will charge an exit fee payable from sales proceeds at 1-2% of either the debt or the GDV.
Brian Rubins, managing director of Alternative, said: “Brokers often fail to recognise how development finance differs from bridging loans – this applies when both attracting opportunities and assembling information. As in all lending, the more detailed and accurate the proposal, the quicker the answer. We have found a run through this checklist saves time and makes money!”