06 Mar Underwriting ‘unwrapped’
When a deal is presented to the credit team, it is important to share as much initial information as possible so that the lender can assess whether they are likely to move forwards and later delays can be avoided. Once the transaction is passed onto underwriting, it can feel that things are out of the borrower and broker’s hands however there are a number of steps that you can take to ensure the process moves ahead as quickly as possible.
Preparation is always the key to be able to provide a comprehensive package of information and will avoid repeated requests. Another key point to bear in mind is that if there is an issue that may be deemed negative such as previous credit history, problems with the property title or a lack of experience then it is essential that these are highlighted at the beginning together with background details and mitigation strategies.
Whilst we do not propose to set out all items that are required, below is a useful list of the information/areas that our underwriting team will analyse before we are able to release funds.
Know your client (KYC) and Anti-Money Laundering (AML)
- In order to successfully complete KYC checks, the borrower must provide the following for each of the directors and shareholders of the borrower company:
- Two separate utility bills dated within the last three months which have been solicitor certified
- An in-date passport copy certified by a solicitor within the last three months
- Last three months’ of company and personal bank statements
- A development CV
- This includes a description of any previously completed schemes, project addresses and sales prices. It is also important to outline scheme type; for example, if projects were ground-up developments, heavy refurbishments or conversions. The CV does not need to be complex, it needs to clearly highlight the strength of a developer’s experience and should not be written as a ‘pitch’ for funding
- Information on where the developer equity is coming from. The source of wealth is essential to ensure that the developer has legitimately obtained their funds and to establish whether there are equity partners involved
- An asset and liability spread sheet which details all of the assets the borrower owns and the debts which they have, including details of mortgage providers and also whether the assets are fully or jointly owned
- Gathering an accurate representation around the sale price of a property is key. Of course it is impossible to say for sure how much a final product will be sold for but putting together a strong estimation is vital
- Ensure that details of comparable sold properties from local agents which are available for site inspection are shared
- It is essential to have the correct insurance before works take place, if the appropriate measures are not implemented, then it will be difficult for any lender to complete on a transaction
- If the scheme involves the acquisition or refurbishment of an existing building, then buildings insurance will need to be put on risk at the reinstatement value
- If it is an existing building which is going to be re-developed or a new build then the contractor will need to evidence its contractors’ all risks insurance incorporating cover for the works, employer’s liability and public liability
- If the land is bare, then you will need to provide public liability insurance
On any insurance policy for a building, the policy should be for at least the term of the loan, the limit of cover should not be less than the reinstatement value of the building set out in our valuation report and the interest of the lender must be noted as a first loss payee. We will also ask that your insurance broker provide a letter confirming that the policy is on risk and that the insurance premium has been paid in full.
- There is a broad range of documentation which needs to be provided by the borrower, being prepared with these items will speed up the process.
- The first thing our solicitor will need in terms of legal documentation is a copy of all title documents and replies to enquiries. In addition, the developer will need to provide all up-to-date searches (local, highways, drainage and water, environmental, chancel repair and any other relevant searches). It is critical that the moment we have agreed to fund your project you ensure that your solicitor requests these various searches as they can take time to come through. It is likely that on an acquisition your solicitor will have done this already, but it is important that all the specific searches requested are provided as these can be more wide ranging than normal
- For a development scheme, we will also need to see a copy of the planning consent along with evidence of appropriate discharge of any planning conditions. They will also need a copy of any related section 106 agreements and community infrastructure levy notices (CIL) and evidence of payment/discharge of these if this has been done already
- One of the main causes of delays in a transaction can be down to the borrower’s choice of solicitor – please remember that cheaper is not necessarily better or quicker and indeed sometimes the opposite. Ensure that your solicitor has experience not only in property development transactions, but also debt finance and construction as well. You should also ensure that the law firm that you use has a minimum of two SRA approved managers. Furthermore, independent legal advice will be required from a separate solicitor that has not been advising on the loan transaction in relation to any guarantees being provided
- A final point is that unlike on normal property transactions, for loan transactions our solicitor will need to be holding all original signed documents prior to completion.
Development / monitoring surveyor side
- Another area to consider is of course the development scheme itself. Carrying out a development can be like conducting an orchestra with multiple counter-parties and moving parts, most importantly every scheme is different. The more these moving parts can be locked down from the beginning the less chance there is for delay and unexpected expenditure at a later stage. Our monitoring surveyor would therefore expect to be reviewing the following:
- Planning consent, and evidence of discharge of planning conditions
- Detailed development budget and construction costs. This information forms the basis of a development appraisal which includes a line by line breakdown of costs items and month by month expected expenditure. It is important to note that we do not fund VAT and build drawdowns are funded in arrears (which is the case with almost all lenders). This means that you should have a cash float to cover at least a month’s worth of development costs and also three month’s worth of VAT. It is important that you incorporate all development costs and not just hard build costs and these will be professional fees, s106 and CIL costs, structural warranty, any further development reports required, contamination remediation costs and at least a 10% contingency
- A realistic build programme which outlines the construction timetable
- Pre-development reports – these are critical as they remove the guesswork from development and give an understanding of the spatial surroundings of a scheme and potential impacts on the development. They will also help inform the technical aspects of the scheme and assist in crystallising forecast development costs. They may of course also be formally required for discharge of planning conditions. Examples of the types of reports that we would expect to see include a ground investigation, a demolition survey, asbestos survey, rights of light survey, structural survey, flooding survey, contamination survey and party wall survey. These will need to be provided as appropriate
- CIL and section 106 notices and agreements are also needed from a monitoring surveyor’s perspective
- A review of all construction related insurances should also be provided including contractor’s all risks insurance, and all PI covers for the main contractor and all members of the professional team
- Detailed technical drawings, building regulation approval of drawings, copy of initial notice to building control if these have been prepared already
- Structural warranty policy and evidence of payment of premium
- Thorough information around the contractor and professional team as well as full details their experience in carrying out similar schemes
- Details of the procurement route, including whether it is a self-build or third party main contractor and a copy of the proposed JCT contract if appropriate
- Details of collateral warranties being provided by the main contractor and the professional team members (at Avamore we are generally prepared to accept market standard RICS or CIC warranties but this will be confirmed by our monitoring surveyor on a case by case basis)
- Specifications for the finished units so that the build costs can be analysed
Whilst it may feel like there are a lot of items to collate, being prepared to issue all of the correct documentation is what helps lenders deliver on the promise of a ‘quick transaction’. At Avamore, we try to be as transparent as possible around the progress of a deal and always seek to work closely with the borrower and broker to gather the necessary information.
As we work through the process together we may in some cases need to highlight areas of risk not only for us but also primarily for the developer. This is part of our collaborative approach to ensure that there are multiple lines of review and assessment so that both parties complete the transaction knowing that any risks have been mitigated and the exciting part in terms of the physical development should go through smoothly.
If you have any questions regarding specific points in the piece, please do not hesitate to get in touch with us.