How do you secure the best property development loan? As you sort through all the advice, documentation and term sheets, keep these 3 tips for financing property development in mind.
1. Be organised with your deal memo and documentation
The first step in financing your development is to prepare an effective deal memo. The more prepared your deal memo is, the more likely you are to succeed when approaching development finance lenders.
Having a credible deal memo means collating a great deal of information – track record, market absorption, comparables, cost per unit, cost per sq. ft, budget breakdown, exit strategy and more. And pay attention to the small details, like labelling your costs or making sure your file names describe what’s in the document (e.g. Site plan.pdf) so it’s easy for the lender to quickly go through everything you provide.
When your deal memo is well-organised, you’re in a stronger position to sell your vision. Lenders will then have more confidence in you, plus you can potentially secure your property development loan more quickly because you won’t have to keep going back and forth answering questions.
2. Don’t go with the cheapest options, go with the right options
It can be tempting to scrimp and save to maximise profit, so you can give a larger headline figure to lenders. But there are times when it pays to spend more – don’t try to value engineer too much at the front end.
Development finance lenders will be scrutinising your professional team, so ensure they have the right experience and can deliver on a project of your size. Solicitors, designers, engineers and contractors are all areas where opting for the cheapest option can cost you more in the long run. For example, it’s not worth going with a contractor that doesn’t have the balance sheet to see through the project. In that situation, any upfront savings will be lost if they go bust and you end up with expensive delays and replacement costs. As a rule of thumb, we like to see at least about 25% of the contract value as shareholder’s equity on the contractor’s balance sheet.
Don’t cut corners on the design approach either. Property development lenders will be looking to see that you can realistically sell units in line with your projections. Gardens and balconies, for example, are hugely popular at the moment, especially in urban areas. And with pandemic-related home working, having space for a desk makes a big difference to marketability.
3. Work with your lender, not against them – and be transparent
All too often, people treat development finance lenders as a faceless, nameless pot of cash. And in the case of traditional lenders, this can be the case. But a good partner should do more than sign the cheques – they should be with you every step of the way.
So don’t try and solve all problems yourself – or hide anything. If there are questions about vendors or timescales, be upfront about it. Lenders have their own skillsets and resources, and can help resolve issues to make a promising opportunity stack up. Any red flags will come out during the review process anyway, so by not being transparent, you risk eroding trust in you and making the process more fraught.
With the right story and deal memo, the right team and the right vision, you’re in a strong position to secure property development finance.
And when you secure financing with the right lender, you gain a partner invested in helping your project succeed.
These are great tips for financing property development.