Presenting your deals and 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 purpose of the funds – including a detailed breakdown.
- 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
- This is the total amount that the borrower requires. 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. Usually, it takes 12-15 months for small developments to complete. 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 the details of planning permission. This is because it could have significant impact on the value of the property and the dynamic of the transaction. We need to understand the number of units and the date of when the scheme recieved planning permission. Planning permission needs implementation within 3 years, otherwise value gets 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. Finally, once work’s started on the site, it’s important to establish whether all pre-commencement conditions are discharged. The most common problem for a developer is miscommunication with the planning authorities. Consequently, this can affect the formal implementation of the planning consent. A lack of clarity around planning can cause a deal to falter, therefore, being transparent is key.
- It is important to understand what the exit strategy of the scheme is 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? This could be an exit bridge / buy-to-let mortgage. 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. This includes 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.
- Residential comparable are something we look out for. However, it is useful to see similar schemes in the area. It is important to know what is going on in the local market. 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. Therefore, involvement during due diligence helps them advise on the viability of a scheme.
When presenting your deals, 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. It will cover what’s important to include when presenting a development finance deal (this is much more complicated).