5 Key Principles for Investing in Exit Loans
Development Exit Funding: A short-term loan facility used to finance a recently completed or near completed development whilst the units are sold. Written by Rob Wilkinson of Crowd With Us
Exit funding can make for an interesting investment where the construction phase is complete or close to completion and the current facility is coming to an end. In this situation, in most instances, the development risk is greatly reduced or eliminated altogether, allowing the borrower to focus on the marketing and sales, or refinance, of the units for the duration of the loan term.
There are a number of factors which need to align in order for an exit loan to be successful and, based on our experience, we outline our top five here.
Our latest project to repay investors in full was Bellmere Gardens, which launched on the platform in October 2019 – before the world had even heard about COVID-19. Although the construction phase was complete, sales of the units had been slow. CWU provided a mezzanine exit loan behind Aspen Bridging for £600,000, taking the combined loan-to-value to 80%. The discounted interest rate for the duration of the term was 20% per annum.
The project appealed to us for a number of reasons. First and foremost, as the construction element of the project was already complete, the overall risk of the project was low. The built units held intrinsic value with the main variable being the sales component. The loan-to-value ratio, although relatively high, still gave room for an exit with a combination of sales and refinance of the units. We understood that the previous sales agent had performed very badly, and since changing agents a number of sales had been agreed. These factors gave CWU a level of comfort in the project and enabled us to approve the project for listing on the platform, with an attractive projected rate of return.
While the risk was reduced for the project, it is never eliminated, and so we thought we’d share our top five principles to adhere to when investing in an exit loan:
Security
With all investments, understanding and ensuring your investment has the correct level of security is imperative. In the case of CWU, we only fundraise for projects with first or second charge security. As Bellmere Gardens was a second charge (mezzanine) loan, it offered investors a higher level of projected return. The charge was lodged at Land Registry, a debenture registered at Companies House, and personal guarantees obtained from the borrower. An intercreditor deed outlining the terms of the relationship between Aspen, the Senior Lender and CWU was drawn up and agreed.
The Exit
As the name suggests, an exit loan is all about the exit. Refinancing a project after an initial loan term where the units have been completed still carries an element of risk, so it is vital to analyse and assess the exit strategy – whether this is sales or refinance or a combination thereof, you will need to be comfortable the exit is viable and the timeframe is reasonable.
Timeframes
The term of a second charge loan will generally mirror that of the Senior Lender and so you will need to feel comfortable that it provides a realistic timeframe for the sales / refinance of the units. In the case of Bellmere Gardens, delays were caused by the pandemic and the loan term needed to be slightly extended. As an investor, it is important to be aware that with many moving parts comes uncertainty. Where a developer requires and requests more time, you will need to be able to assess the position to understand the implications of allowing an extension or not.
CWU had been working closely with both the borrower and Senior Lender. We were aware of sales proceeding and refinances underway. We also took into consideration the pandemic. We endeavoured to work with the borrower while also maintaining the interests of our investors and as such, agreed a period of extension at the existing rate of return (20% pa) and only increasing it to the higher rate (24% pa) once the extension period came to an end. As such, investors received an overall return of more than 20% per annum.
Partial Repayments
Sales and refinances may occur at different points in time. This allows for partial repayments to be made during the loan term, which gradually reduces the exposure and loan-to-value of a project. It is important to be clear up-front as to how these partial repayments will be handled and how the interest will be calculated.
Partnerships
The final element to be aware of is the importance of your working partnerships. These are your relationships with the borrower, Senior Lender, solicitors and other professionals. Open channels of communication and a collaborative approach to these relationships is vital to enable the loan to run smoothly and to overcome and navigate any issues that may arise.
Exit loans offer an attractive opportunity to investors where the risks and opportunities are fully assessed and where the correct structure is put into place. If you would like to find out more about raising funds for a project or investing in similar schemes, please visit our website and / or contact us on hello@crowdwithus.london.
Risk Warning: The returns of this investment represent a higher-risk investment than a savings account and there is the possibility that you could lose all your money invested in this product. The investments on this website are only available to investors who meet certain net worth or investment sophistication criteria.