How To Get The Best Property Development Finance Deal
Financing costs impact your profits, so you need to get the deal structure right. That means getting the best property development finance available that suits your project.09 August 2019
Financing costs impact your profits, so you need to get the deal structure right. That means getting the best property development finance available that suits your project.
However, too often, developers get bogged down in lengthy negotiations and legal minutiae that end up delaying projects and wasting money.
How do you fast-track the process and get the best property development finance so you can get the project started?
The secret is to stop wasting time and money piecing together your senior, mezzanine and equity funding separately. Find a one-stop funder that makes your capital stack more cost-effective, the funding process more efficient and the project more successful. Here’s why.
Minimise the risk, time and hassle associated with the funding process
The argument in favour of separate funding packages is that you can theoretically drive down rates at each stage.
“Theoretically” is the key word in that sentence. Developers often underestimate the meetings, negotiations and documentation involved in piecing together senior, mezzanine and equity funding. It’s difficult to come out ahead after factoring in the time and hassle of coordinating the parties and inter-creditor agreements.
Your lenders won’t release funds without inter-creditor agreements. Negotiating this can easily take six to eight months as lenders go back and forth with each other. There is nothing certain during that time period, which means you’re in a risky position. If one party isn’t happy during the process, they can drop out. Then you have to scramble around for a replacement and must start from square one of your search for the best property development finance.
Control the actual cost of capital — it’s not just about the headline rates
The cost of financing to you, the developer, isn’t the percentage you see on the indicative term sheet. It’s the actual cost of capital across the stack.
There are also the very real costs associated with multiple fees. You’ll have arrangement and exit fees, valuation costs and legal costs for each lender you work with. This means you can end up tripling your fee costs by working with three parties.
When you work with one provider, you have one agreement for a single property development loan that covers all three stages. You don’t have interminable negotiations between parties driving up costs, and you only have one set of fees.
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Consider the opportunity cost
While you’re waiting for lenders to collate information and negotiate inter-creditor agreements, you can’t progress with the project. That means you could lose out on your site or your preferred professional team. And that represents a very high opportunity cost.
With a one-stop funding solution, you can have everything wrapped up in six to eight weeks, with your money in the bank. Therefore, you can generally make more profit by having a single specialist sort the funding for you, so you can focus on securing more sites and finishing projects more quickly.
Ensure your funding partner is on your side
I know this sounds obvious, but it’s a key point. And it’s often sacrificed because developers are chasing a slightly lower headline rate (that they don’t end up getting anyway).
If you’re piecing together three sets of funding, your providers are each involved in a smaller share of the project. This means they focused on their return, not the project’s success. For example, a senior lender will typically go up to 60–70% LTGDV. This protects them from any issues or market fluctuations. They get their money back and, if there are problems, leave the developer to take the hit at the back end.
A one-stop funder mitigates this risk for you because you have a funding partner invested in the project. At Hilltop, we offer up to 90% LTC – we take on more risk and are more aligned to the developer. It means we do more work with you upfront to make sure the project stacks up, keeping us both safe. It means that if something goes wrong, we all sit round the table to find a solution. And it means the project’s success at the back end is what drives us, because we’re all in it together.
If your lender isn’t invested in this way, your exposure to risk increases. Just for the sake of (potentially) knocking a fraction of a per cent off a rate.
Achieve your goal by building relationships
Approaching finance with a relationship-oriented mindset, you can focus on your actual goal — to build a scalable property development business.
When you have a good relationship with your funding partner, everything generally works out more cost-effectively in the long run. You don’t have to lay the foundation and establish your credentials for each project. You can focus on the development process where your expertise and interest lie rather than bogged down in the financing side. And you can be confident your funding partner is aligned with your interests, because their return comes at the back end.
In other words, you can move more quickly on future projects, so you can scale the business in an entrepreneurial way.
And that’s why developers choose to work with us. They get a partner with heavyweight investment backing. One interested in their business, not in ticking boxes or running deal stats through an algorithm. They know they’re getting the best property development finance and the expertise they need to give projects the best chance of success.