A guide to securing development finance for your property

Posted by: Adrian Cormican
Category: Funding
Development Finance - Horsham property

During our time at the brokerage, we have noticed how easily some clients receive development finance whilst others face various challenges. To stay ahead we’ve created a guide in best practices to ensure as a developer, you secure real estate finance as efficiently and effectively as possible.

 

The Essentials

It’s important to get the essentials right before you research your project any further. You will need to organise three essential things in order to get your application off to a good start. By getting the essentials in place, you can avoid any mishaps along the way.

  1. A Robust CV

The first thing we ask for is a robust CV. We want to know what projects you have completed in the past, what your professional skills sets are, and what makes you attractive for the project you are undertaking. It’s an advantage if you include what makes your project achievable, preferably by showing that you have done something to a similar scale previously.

If you don’t have any experience, it may be difficult to receive any type of development finance. However, if you are investing a lot of equity into the project, this can sometimes be excused. If this isn’t an option, it could be better to build a relationship with a slightly more experienced developer and collaborate on a project with them to gain the experience required. One thing for sure is that you will have to have at least experience or equity. Without one, the chances of securing any form of capital from the financial market will be unlikely.

  1. An in-depth review of your cost

 A full appraisal will be needed so that the investors can understand your proposed project in more detail. This will typically include a breakdown of costs that you expect to have within your property development project. This may cover construction costs, professional fees (such as architectural designs), engineers, and lawyers. Also, an additional cost that new developers may not be aware of, but need to take into consideration, is CIL (Community Infrastructure Levy) payments. Think of CIL payments as a property tax for developers.

  1. Hurt money

Hurt money refers to your stake in the project.  It’s possibly referred to as hurt money in the industry as it is the money most at risk, should something go wrong. Think of this in the form of equity, How much would you be willing to put into the transaction and potentially lose? Either way, capital is needed initially and may not be fully recuperated.

 

Different types of Finance

Following a successful presentation of the above essentials, Hallcroft will then look to structure the development finance requirement with a variety of funding options available to you. These include:

  • High street lenders – these are your well know high street banks that are in most towns across the UK.
  • Merchant Banks –  these can include property development and bridging specialists. Your circumstances may be better suited to a bridging facility if you need to get from the purchase stage to the planning permission Whereas a development facility is better suited to those that have full planning permission to produce a product, whether that be a house, a care home, a leisure centre and so forth.
  • Funds – These funds are available from experienced and knowledgeable financers in the market that have an entrepreneurial spirit. They are often approached to start a new organisation and deploy money into certain segments of the market. It’s our role to ensure we are at the forefront of knowing of these funds as they come to market, for the benefit of our clients.
  • Mezzanine finance/second charge money –You may face the scenario where lack of cash flow dictates that there are insufficient funds to move forward with your project. However, in this scenario, there are loans available in the market that will support a senior lender, this is known as mezzanine finance or a mezzanine loan. It is more expensive recognising the extra risk they are taking with the loan but it is also a very powerful way to grow a property portfolio if used with skill and expertise.
  • Equity/Investors –The ability to secure equity from investors is a skill that Hallcroft has finessed. Securing investors/equity is not an overnight job. Building relationships is key in this industry. However, having a rapport and clear lines of communication with investors can help your business thrive. We’re often approached by new developers that are seeking equity/investors with no relationship intact. Building a rapport with Hallcroft in order to have access to our investors is important, as keeping our investors secure is a business skill we take very seriously.

 

The Application Process

  1. Present the essentials as listed above.
  2. Hallcroft will secure the financial structure appropriate for the project.
  3. Achieve credit approval – this will give a firm indication that the financers will move forward with the proposed project.
  4. Instruct all the professionals required. These can include quantity surveyors, lawyers, valuers, architects, engineers, and a construction team.
  5. Once these steps have been carried out, you will be in a position where the site will be ready to purchase.

 

Shortcuts to avoid

It may be tempting to take shortcuts throughout the process of finding development finance. However, I have seen many mistakes made during my time at the brokerage. Here are some things you may want to consider to avoid doing:

  • Treating your professional team like your friends. Whilst you may have a lot in common with them, they are there for commercial reasons and are looking to make a profit. Fallouts could be expensive, so choose your team wisely.
  • Producing a financial appraisal, and leaving costs out because you want to achieve the right return on paper. I’ve seen many appraisals that are not realistic and are created as a result of the developer wanting the site. Tweaking the figures on paper won’t change the reality that the risk is high and the return is low. In these circumstances, it’s recommended to walk away.
  • Going into business in a partnership, and not having a watertight shareholders agreement. It’s recommended to have contingency plans in place should certain scenarios occur. Having documentation of your shareholders agreement means any fallout with partners can be resolved according to the shareholders’ agreement.

 

A final word

As we’ve been in the development finance business for over 10 years, we feel very confident in being able to recognise expertise. If you are a new or aspiring property developer, you may come across Banker A. Banker A is telling you everything you want to hear and you’re very excited thinking you’ve found the support you need. However, you won’t be able to identify if Banker A has a good track record internally at their organisation. We would. Hallcroft can help you secure funding for your project from a trustworthy source. We’ve built relationships for the past 11 years and we have access to a great number of investors. We know our investors really well and will be able to pair you with an investor that’s right for you.

 

If you would like to talk about taking the first step in your development project, get in touch.

 

 

Adrian Cormican
Author: Adrian Cormican