Putting a project together that stacks financially, that you feel can be executed, with the right delivery partners and right market conditions, can feel like hitting the development lottery. Many developers were caught in a position in 2008, and latterly through out a period of change from 2019-20, where they get the dreaded call from their lender to confirm their worst fears…..lending has been pulled.
Whether it was when “Amicus Finance Plc entered administration”, or Lendy’s Peer to Peer struggles, the choice of lender and their funding background is a crucial part of the decision making process for Developers. Although hindsight can be a wonderful thing, it can be a costly luxury that developers cannot afford. Stress test your financial model and what it can take.
Can they pull the plug, don’t we have an agreement in place?
The cold hard truth is that the balance of power between an SME developer and a lender is stacked heavily in favour of the lender. A look at your loan agreement shows this.
The ability to sell the loan or its liabilities is only allowed one way… the Lender. The loan contains a number of warranties and undertakings, and if you fail to comply with just one of these can register as a breach and trigger action form the lender. There is also the material adverse clause, which can mean if things change the lender can reconsider its own position. However, I should point out that a lender with an historical commitment to the sector is unlikely to exit or pull out without good reason.
The nature of funding in property development is that you get the loans in tranches over time. This means the bank can physically stop future funding, unlike a mortgage where all the funds are given upfront. If you have very little working capital in the project it can mean that you have men on the ground that need paying, and this can result in work stopping at a crucial stage.
Structure your deal so you’re unlikely to be affected if you receive the call
Structure your facility in away that it can be refinanced. 90% LTC (Loan-to-cost) may seem like a great way to get your project funded, but in reality it can leave you with very few alternative partners. For a developer this can be the equivalent of designing and building a type of house that no one in the local area wants to live in.
Maintain and increase your communication with your lender
- Was this something that was caused by you? Has the lender selected to cut your project from a choice of many?
- Is the lender out of the market due to a regulatory issue?
- Is the lender out of the market due to its own funding issue?
- Is the lender out of the market due to a strategic issue?
The first port of call is to understand if you can you rectify this. Your own project may not be the reason for the lender pulling out.
If the lender has to exit due to capital issues, can you support them by increasing the equity in your project by finding a new investor; would this help?
It may be worth understanding if you can reduce the loan by refinancing it quickly. When a lender has a financial issue, there is a danger that the loan book could be sold to a more aggressive lender. Where the loan book is sold at a discount, the new lender may be incentivised to repossess some sites and/or more aggressively seek a refinance.
Find a new Lender
Although you may need to refinance, maintaining a close relationship with the lender can give you time; perhaps negotiate another 1-3 drawdowns prior to refinance, this can be crucial. That said, refinancing mid construction is never easy.
Be prepared and ensure that all drawdowns, or at least regular project monitor reports, are produced. This is an independent verification, recording and checking that the works you have done to date are exactly as you require. This will make opportunity more attractive to other lenders.
As with all things, the worst time to create a new relationship is when you have none. In building your financial strategy you should always consider how many relationships you have with different lenders. This can help when you need to refinance.
Critical to refinancing is being able to pitch the positives of the project, the numbers, the sales, and the build. You have to deal with the transition to the new lender and why the lender should be comfortable with the transition.
In the current market, there are a number of lenders who are focused on assisting developers with projects that are half finished. This should give you confidence that there is a solution available.
It’s never part of the business plan to have your main funder pull out of the project, however the impact can be limited by work upfront on the structure, and the ongoing relationship with the existing lender and new lenders. When it comes to actually refinancing, it’s critical to show that the project is being well managed and would be an asset to a new lender.
Image credit: iStock.com/vandervelden