Finance Roll

Development finance certainly saw some significant changes in the last three years when the number of development lenders dropped and funding became more difficult to obtain.

However, there are still deals to be done and still a number of lenders who are genuinely willing to lend. It's imperative to find lenders with enthusiasm. Brokers need to identify the right lender for the loan and ensure their client can meet the lender's criteria.

The development finance market is an area with growing demand for funding because the big banks still have no appetite for this type of lending at the moment. The lack of competition has led to relatively high pricing, which means there must be decent profit levels in each and every deal.

In speaking with a few of our developers, they shared that they are still very sensitive toward current pricing, whereas others have accepted that low-cost funding in this area doesn't really exist anymore. The deal can get done but at a higher cost.

Another aspect to consider is the type of development being financed. Commercial development funding for speculative builds is very difficult (if not impossible) at the moment due to limited exit routes for the lender. However, for the right deals, at sensible loan to values and where the underlying security property is good quality with good rental demand, they can still be funded at LTVs around the 65% mark, somewhat higher in tier one territories.

While some lenders are mainly biased towards the east coast or other tier one areas, the main objective is to build and sell, so it is important to build where the market is most active.

With this in mind, it's imperative that Brokers assemble a comprehensive package of information before approaching lenders. Presenting the full package to potential lenders in the right way is crucial in order to secure development finance for a client. Your package should contain the developers resume, an itemized accounting of how the loan proceeds will be utilized, financials on the business and the developer for the past 3 years, a summary of the project, rent rolls and projections.

All of our lenders emphasized that funding is very much dependent on the individual borrower's experience and circumstances. Most lenders will not consider a proposal where the client does not have good experience, and that must be of buying, developing and selling, not just of project management or building experience.

The best advice for brokers is to have relationships lined up and ready so that when they find a borrower, the deal can move forward quickly.