07 Jan Presenting your deals
Presenting lending opportunities can sometimes be challenging due to the complex nature of the property market and it is very important for brokers and borrowers to understand what to include in their deal summary. Furthermore, due to a lender’s size, structure, management team, processes, source of funding, etc, it can have a range of requirements around how deals are presented, which can often become confusing. For us at Avamore, we like to know as much information as possible in the first instance so that the credit team is able to make an informed decision and the deal has the best chance of reaching completion. There is however a danger of sharing too much at the outset which can confuse the lender, particularly when it is not packaged or presented correctly.
So, what does Avamore need to know? We have put together a list of some of the details we would need to assess a bridge or development deal. There are specific points which are needed only for development in addition to the below and this will be covered later in the series. We hope that borrowers and brokers can use it as a tool to complement their initial due diligence process.
Bridge and Development Loan
- Purpose of the loan
- An overview of exactly what the funds will be used for including a detailed breakdown.
- Transaction history
- This information along with the purpose of the loan is an important point as it can be an indicator of problems including (but not limited to) planning, contamination, structural defects, problems with neighbours, etc. Whilst the transaction history does not need to be extensive in the first instance, you do need to be confident if the lender asks further questions. The transaction history covers when the property was purchased, how long the borrower has owned the property and whether there has been a change of use. This is important because if we discover early on that the property has been traded or sold on a number of times in the past few years, then we will need to perform more detailed analysis at an early stage in the transaction.
- We often find that brokers are able to share the location of a property but sometimes it is difficult to obtain a specific address. This is important so that the credit team can examine the street view, look into comparables and consider local amenities or distances to major stations and cities. What’s more, different regions have ‘micro-areas’ and so the specific location can influence the suitability of the deal and the value of the property, even if you are comparing across a few streets.
- Asset class (residential/semi-commercial/commercial)
- We need to understand where the property would fall in the lending criteria in terms of asset class. This could influence the product which we lend under and incorrect information could cause a mismatched valuation of the property which can be detrimental to a deal completing.
- Value/Purchase price (LTC if different)
- It is important to clarify whether there is any difference between the market value of the property and the purchase price. If the purchase price is much lower than expected, we would need to understand what the reason is for a below-market transaction. On the LTC side, if this is different, we need to know how much equity the borrower is investing in the project
- Loan requirement
- This is the total amount required by the borrower. Very often there can be confusion around gross and net amounts. For instance, in cases where the loan is not serviced, the interest is normally retained by the lender, therefore the net loan advance is lower than the total loan amount (gross loan).
- Brokers and borrowers need to review and assess all stages of the project in order to request relevant terms. In short term lending, the loan period does not normally exceed 18-24 months. Most small developments can be completed in 12-15 months. The average term for pure bridging loans with no subsequent release of funds is normally between 6-12 months.
- Planning permission (if applicable)
- It is important to have all of the details of planning permission as this can have a significant impact on the value of the property and the dynamic of the transaction. We would need to understand the number of units and the date of when planning permission was granted (planning permission should be implemented within 3 years and if this time passes the value is lost). Onerous planning conditions also need to be flagged early on. The borrower should be careful in terms of timing for discharge of any planning conditions, hence the importance of the above. Finally, if works have already started on the site it is important to establish whether all pre-commencement conditions have been discharged. The most common problem for a developer is miscommunication with the planning authorities which can affect the formal implementation of the planning consent. A lack of clarity around planning can cause a deal to falter further down the line and so it is important to be as transparent as possible early on.
- It is hugely important to understand what the exit strategy of the scheme is in order to assess whether a project is viable. Is the developer planning to sell or to refinance? If it is a sale, is the customer adding any value now? What is the interest like for similar properties? Has there been any feedback from local agents? If the developer is planning on refinancing what type of product will they be looking for (could be an exit bridge / buy-to-let mortgage) and what will the LTV be?
- Overview of the client
- It is good for us to see the developer’s CV and crucial to know information about client experience including details of other investment and development projects. This provides clarity around the developer’s experience and their ability to deliver projects in cases of refurbishment and/or development projects. It is also important to be upfront about any previous insolvencies or anything which can affect the lender’s decision.
- Whilst we would search for residential comparables ourselves it is useful to be presented with similar schemes in the local area. It is important to know what is going on in the local market, what the right product is to suit the demand and have some evidence of sold units. It is like running a test of what the outcome is likely to be for the development. It’s good to obtain these comparables from local agents, not just online platforms like rightmove and Zoopla. Local agents know their market very well so they should be involved at an early stage of the due diligence to advise on the viability of the scheme.
In order to present a deal correctly, it is important to consider all of the above points. In addition, these will help borrowers and brokers conduct their own due diligence to understand whether a scheme is viable. Remember to look out for our next article which covers points it is important to include when presenting a development finance deal (this is much more complicated).