Keith Forster, from specialist finance brokers, PF&D Limited, provides advice on what to consider when financing your next development.
Development Finance is not just about the interest rate. As brokers we often find that some developers seem to be more interested in saving a few bob on the interest rate, rather than ensuring the lender they choose can deliver the right blend of finance and quickly – and above all, are able to be flexible when needed.
Some lenders limit their loan to 60% of costs, in order that they can offer low rates of interest. This means the developer has to find 40% of costs, which amounts to a massive drain on cash flow and, as the saying goes, ‘cash is king’.
Other lenders with slightly higher interest rates offer up to 90% of costs, which means the developer only needs to find 10% of all costs. That is a full 30% less cash required to make the same deal work.
The extra cash available to the developer, from this higher interest rate facility, can be put towards buying other sites. If developers can successfully spread their capital over more sites, rather than tie it up in a ‘low interest’ facility, this will create more opportunities to make more profit – which should far outweigh any extra cost that may come from a slightly higher interest rate.
“a lender should have the ability to be flexible on key points, at key times in the process.”
A commercial view
All too often lenders offering enticing rates are burdened with lending covenants that do not allow any flexibility. All lenders, large and small, get their funding lines from somewhere. These can, and often do, come with ‘handcuffs’. Consequently, before funds can be released to the developer, the lender has a strict set of criteria that must be adhered to before drawn down. These criteria can lead to severe delays in getting a deal ‘over the line’.
For example: if a developer has exchanged on a site and thus has a completion deadline to meet, but cannot do so due to the onerous requisitions laid down by his ‘low rate’ lender, then this can lead to significant consequences for the project – not to mention a degree of stress and turmoil.
We and many of our clients feel it essential that a lender should have the ability to be flexible on key points, at key times in the process. So finding the most appropriate lender for one’s needs, is often more important than trying to locate a lender offering the lowest rate.
Work with decision makers
We believe it key to associate with lenders who offer competitive terms, but whose emphasis is on agility and an ability to ‘take a view’ on issues that affect things such as a speedy completion. Most housebuilders will be fully aware that some commentary in a valuation or QS report can have a negative impact on events leading to completion, as can pedantic legal issues. Good lenders offer a point of contact, often a senior person within the organisation, who can, when needed, take a commercial view on professional reports – and will often agree to certain legal & QS tasks being carried out post completion.
This flexibility is much more important than shaving half a percentage point off the rate, as it gives housebuilders peace of mind that should things get tricky along the way (as they regularly do) they know that they can contact someone who will look to make things happen.
Keith Forster is Director of specialist brokers PF&D Limited. For more information visit www.propertyfinanceanddevelopment.co.uk