4 Common Funding Pitfalls for SME Residential Developers

by | Jun 3, 2019

For SME developers, securing funding has been needlessly frustrating, time-consuming and expensive for too long. I often speak to an exasperated developer who’s spent 6 months managing hundreds of emails, sitting through hours of meetings. And they still have nothing to show for it.

How to finance property development doesn’t need to be like this. With rising consumer demand, Government housebuilding targets and an alternative lending wave, SME developers should be able to move quickly. Avoiding these 4 common funding pitfalls will help you manage costs, seize opportunities and drive projects forward.

1. Not presenting a credible deal memo to funders

Many SME developers prepare a rough development appraisal spreadsheet and send it to the lender. Within 36 hours they get an indicative term sheet, excitement mounts…and then the questions start.

To put together the funding package and provide actual terms, the lender needs more detail. This means there’s endless back and forth as everyone pieces together the required information. Months can go by with little tangible progress. And after all that, the deal can fall apart if the numbers don’t add up.

If you prepare a credible deal memo upfront, the whole process is more efficient. This means presenting the full economics for the various pieces of financing. It means underwriting the market, providing comparables, outlining your exit strategy and including third-party back-up information.

Not all SME developers have the time or toolkit to do this themselves. So it’s worth looking for funders who will partner with you to prepare the memo. The right partner will do the underwriting and put the analysis together before you go to the investment committee. This maximises your chances of getting a firm offer within weeks. And it gives all parties confidence the project can be delivered successfully.

2. Not underwriting the professional team

With the collapse of Carillion, contractor due diligence has been in the spotlight – and the risks apply to the SME end of the market, too.

Too many developers overlook this key step in the funding process. Check the professional team has both the balance sheet and experience to complete the project. Your lender will want evidence of this, and it can jeopardise the funding process (even the entire project) if this underwriting isn’t in place.


3. Piecing together senior, mezzanine and equity funding separately

Securing 3 different sets of funding can seem like a cost-effective approach because you can theoretically drive down rates at each stage. But developers often underestimate the meetings, negotiations and documentation involved, as well as the specialist knowledge required to navigate the nuances of senior, mezzanine and equity. It’s actually very difficult to come out ahead once you’ve factored in the legal and time costs associated with coordinating 3 separate funding packages.

On deals of £20 million or less, it’s generally more cost effective to work with one provider. You’ll have one agreement for a single credit facility that covers all 3 stages. And it’s much faster, too – it can easily take 6 to 8 months to complete your deal using 3 funders. Whereas it can be done in 6 to 8 weeks if you use the right one-stop shop.

4. Focusing on price

Indicative term sheets can be like broadband advertising. There’s an attention-grabbing headline rate, but most people aren’t eligible for it because of their specific situation. With broadband, it’s about your location or the state of the cables. With residential lending, it’s about the process of securing funding and the way packages are structured.

Look beyond the headline rates. Consider the time you’ll have to spend and the legal hoops you’ll have to jump through. All that comes with a cost that affects the project’s overall profitability.

Also consider your relationship with the lender and where their interest lies. If it’s a transactional relationship, you can find yourself under immense pressure down the line depending on how your project costs evolve and what your sales are like. If the lender’s returns are driven by profit share on the back-end of the deal, you have a partner aligned to your exit strategy. A partner who will offer more support in line with market dynamics.


All these pitfalls can lead to overpaying

You need a deep analysis of the market demand, comparables, affordability and rental data to negotiate with investment committees. You need to ensure your supply chain can deliver. And you need to factor in the time and legal costs of coordinating with funders. Your costs can easily escalate if you don’t – and that can have a major impact on profitability.

Avoiding these 4 common funding pitfalls will help you secure the right funding package at the right price. It will give you the support you need to deliver successful projects.

Learn more about the funding we offer SME developers – and how we partner with you to make the process easy.

Interesting article? Put our experience to work…

View from the Top #21

Hilltop Enters Joint Venture with MCAP Global Finance Hill has entered a joint venture with MCAP Global Finance to lend to residential...

Hilltop Credit Partners announces partnership with MCAP Global Finance (UK) LLP and completes £33 million loan for newbuild residential development in Worcester

Real estate development lending platform Hilltop Credit Partners announces a funding partnership with MCAP Global Finance (UK) LLP, the UK...

Hilltop Credit Partners achieves successful repayment of €5 million mezzanine facility to fund re-development of historic train factory in Helsinki, Finland

Funds advised by Hilltop Credit Partners have achieved successful re-payment of a pre-development bridge loan of €5 million to Train...

Hilltop Credit Partners completes £3 million loan for new build residential homes in Brinkworth

Funds advised by Hilltop Credit Partners have provided a development finance facility of £3m to Pars Developments.Funds will be used to...

Hilltop Credit Partners completes £8.7 million loan for newbuild residential-led development in Leicester city centre

Funds advised by Hilltop Credit Partners have provided a development finance facility of £8.7m to Mitchian Alliance LimitedFunds will be...

It’s a wonderful life – year-end milestones

In the movie, It’s a wonderful life, it’s 1946 and George Bailey, a businessman is close to jumping off a bridge on Christmas Eve when...

Hilltop Credit Partners completes record bridging deals in Q4 with transactions in the North of England and Scotland

Funds advised by Hilltop Credit Partners have provided three pre-development bridging loans totalling £7.25m to developers in Bolton...

As seen in...

Fintech Finance logo
Logo - CoStar
Logo - Business Leader
Logo - Development Finance Today
Logo - Real Estate Capital
Logo - CoStar
Logo - Business Leader
Logo - Development Finance Today
Logo - Real Estate Capital
Logo - CoStar
Logo - Business Leader
Logo - Development Finance Today
Logo - Bridging Loan Directory
Logo - Property Week
Logo - IPE Real Assets
Logo - Business Daily News

Register your interest here

 

Let’s talk! Get in touch on +44 (0) 203 903 6369 
or leave us a message below and we’ll get right back to you.

1 + 3 =

  • Share This