What Due Diligence Will Development Finance Lenders Undertake on a Project?
Gary Walsh is the Director and Owner of Optima Property Funding. In this article, he talks about the information needed by lenders to accept and process credit applications for property projects.
I recently ran a poll on LinkedIn asking property developers what mattered most to them when sourcing finance: amount, price or service?
The results were a tad surprising, or maybe not?
Service 44%
Price 39%
Amount 17%
I dug a little deeper and established that ‘service’, whilst covering many aspects of the process, could be summarised as ‘the certainty to deliver the funding in a pain-free and timely manner’.
However (and having sat in the lender’s chair in my earlier career), I have some sympathy for lenders; the quality of the information presented to them by borrowers ranges from the sublime to the ridiculous. Lenders (and brokers) receive a spectrum of data ranging from a full business plan to numbers on the ‘back of a postage stamp’. And their pet hate? A one-line email with a link to a Dropbox file and Planning Portal containing numerous random and unlabelled documents.
Lenders are busy and if presented with minimal, poorly submitted information, they are likely to put it at the bottom of the pile or decline.
Borrowers can significantly improve the chances of gaining traction from a lender by presenting a detailed pack of information. Without wishing to teach grandma, here is the aide memoir I use; you will note that I lead with information about the borrower and then the project.
The lender and/or the appointed professional team (valuer/PMS/lawyers) will require to see some or all of the following (although not necessarily all at the beginning of the process). The level of due diligence will vary from lender to lender, and not all lenders require the full list. Items marked with an * are required to enable the lender to take the application through the credit process.
Executive Summary
A brief bullet point overview (one page maximum) of the project to include borrower background and name, project address, description of asset ‘as is’ and ‘to be’, GDV, purchase price, build costs, net profit before finance, cash/equity investment, borrowing requirement. *
About the Developer and the Team
1. CV/Portfolio of projects, both historical and current. To include name of borrowing entity, address, description, date commenced and completed, GDV, net profit, lender(s). *
2. Accounts/financial statement of affairs including details of other current schemes, if applicable. *
3. Asset and liability statements of directors/major shareholders. *
4. Details of the intended borrowing vehicle including directors/shareholders. *
5. A credit reference agency report on directors/major shareholders and a search on any company borrower. *
6. Business and personal bank statements.
7. Statutory money laundering requirements (ID/residency/evidence of and source of deposit etc.). *
8. Developers’ professional team including architects, QS, structural engineers, contractors, M&E, selling agents, lawyers for professional competence, PI cover, and financial creditworthiness (where applicable). *
9. Collateral warranties may be required from the professional team (architect, structural engineer etc.).
About the Project
1. A robust development appraisal where estimated GDV and construction costs/professional fees are realistic to conservative. Consider using bespoke industry software. *
The scheme should be showing a minimum return on cost (ROC) or return on sale (ROS) before application of finance charges. The amount required will depend upon specific lender policy but typically will be a minimum of 20% ROC (16.7% ROS) for standard senior debt, 25% ROC (20% ROS) for stretched senior debt / mezzanine and potentially higher returns for equity investment. The project length will have an impact on post-finance profitability and thus pre-finance target returns.
2. Marketing and sales plan with schedule of accommodation. *
3. Evidence of comparable GDV figures from both local selling agents and on-line data sources. *
4. Detailed breakdown of construction costs and professional fees and evidence that the borrower can deliver these numbers (data from previous projects/QS report etc.). *
5. Build and sales programme and cash flow detailing periods for pre-construction, construction and sales. *
6. Site plan and scheme drawings for design, access, construction matters. *
7. Planning Consent (or Permitted Development Rights) to ensure that the consent is valid, workable and not onerous. All pre-development conditions must be satisfied before a lender will advance any money on the construction element of the loan (and some lenders will not advance the land loan element if the conditions are onerous). *
8. s. 106/CIIL/Statutory Liabilities details, if applicable. *
9. HM Land Registry Title Document copies. *
10. Construction Warranty. Most lenders, but not all, will require the scheme to be covered by a warranty such as NHBC, Premier, BLP etc. Warranties are available for conversions and heavy refurbishments as well as new build property. Most lenders will accept a warranty that is acceptable to the CML (Council of Mortgage Lenders) for residential mortgage purposes. It is worth noting that term lenders offering residential investment finance are increasingly requiring completed units to be covered by a warranty and are declining applications where there is not one or are offering a reduced LTV.
11. Building regulations, prior to commencement of construction.
12. Party wall agreements, if applicable.
13. Appropriate insurance policies (fire/contractors all risks/public liability etc.).
14. Desktop (phase 1) and intrusive ground reports (phase 2) for contamination, soil composition/footing design etc.
15. Structural engineers report, if applicable.
16. JCT documents where Contractor appointed.
17. A valuation of GDV and RLV from a RICS Valuer (if one is available, submit with application).
18. An assessment of build costs/professional fees from a PMS.
19. Report on Title from lender’s lawyer.