How to present a development deal? Presenting lending opportunities can sometimes be challenging due to the complex nature of the property market. In addition, because of a lender’s size, structure, management team, processes and lending criteria, it inevitably varies what information each funder needs to see.
For us at Avamore the key information to cover at initial enquiry stage includes
- Market value and/or purchase price
- Build cost / build facility requirement, including (but not limited to professional fees, S106 and CIL)
- Length of term required and proposed build periods
- Full project address
- Photograph of the property
- Plans & evaluations for the completed scheme
- The total borrowing requirement and borrower’s equity contribution
The above makes it easy for the Avamore credit team to assess whether or not it can move a deal forward (for more detail on the initial points, please click here). After this initial summary, things become more complicated and any lender will request more and more information the further a deal progresses.
We have compiled a list of the ‘nitty gritty’ points which borrowers and brokers will need to gather for development finance. It is useful to be aware of the lenders expectations and whilst you do not want to overwhelm the funder at first contact, being prepared to present to following points helps move the deal forward in an efficient manner:
This might feel like a simple summary. However, it is extremely important to understand the market dynamics, particularly the supply and demand in the area. It is a good idea to check whether the developer has spoken to a local agent to understand the feasibility of the scheme and ensure that they have conducted a thorough site visit. This will help with understanding the market and also, the sub-market segmentation. It is likely that there will be an equilibrium price which is a function of the micro-location, proximity to transport links, local employment opportunities and amenities, checking all of these factors will help establish the approximate sale price of a property. Also, acute developers/investors should try to understand the volume of new products coming to the market around the completion date of their project.
Details around the product
It is important to narrow down what exactly the developer is intending to build. We need a thorough description along with accurate comparison and placement amongst the rest of the market. A scheme which has sold at a good price, within a reasonable time-frame, will comfort the lender around the value of the scheme.
Profiling an ideal customer also helps with a development finance application. It highlights whether there is a large enough pool to purchase the property. Establishing if it will appeal to owner-occupiers or investors is important because it helps ‘match up’ the number of potential buyers for that scheme. In the case of appealing to investors, it would be wise to fully understand the rental market and the financial products available. This includes things like a potential investor who may need to take a buy-to-let mortgage on the property.
Breakdown of build costs & a development appraisal
For a development project, it is important to provide an overview of the costs which would be incurred. This include construction costs, professional team costs, CIL, s106, etc. In general, a development appraisal is a useful tool for establishing the feasibility of a project. It is likely to highlight any red flags which might come up. In the appraisal, it is useful to consider factors such as the build cost per square foot (is it net internal area (NIA) or gross internal area (GIA)?), additional fees, marketing costs and a contingency budget
GDV (breakdown of GDV per unit)
The total GDV and the breakdown per unit GDV helps to understand the viability of a scheme. If a developer is building multiple units and one will make up a significant proportion of the total GDV, the lender will need to assess the feasibility of a successful exit for different sized schemes.
Construction/professional team overview
It is incredibly important to understand who is supporting the developer to see the project through to completion. The lender will need to know thorough details around the contractor. This includes experience and previously completed projects as well as information around the build contract. In addition, it is essential to know who the architect, structural engineer, M&E engineer, project manager and employer’s agent are (the level of involvement for each of these participants is very dependent on the size of the scheme)
The lender will always need clarity around how much equity the borrower has invested in the scheme. Therefore, the LTC in incredibly important to ensure the borrower has ‘skin in the game’
Land to Build, Land to GDV and Land to Total Cost ratios
Comparing the cost of the land to other factors in the project can be valuable for a lender and developers. Land values can be very volatile especially when the ratio of market value to total cost is low. In similar circumstances, developers should be very cautious when inputting the build cost and GDV into their development appraisals. This is in order to avoid overpaying for land.
The above list is not comprehensive and applicable to all lenders. For Avamore, it puts the credit team in good stead to move the deal along. It also contributes to an efficient completion for the borrower and broker.