Starting on your first property development project is an exciting prospect, but it comes with its fair share of challenges, particularly when it comes to securing funding. The process of securing finance for your development is a crucial stepping stone on your journey. It requires thorough preparation, meticulous due diligence, and strategic financial planning to ensure the project’s success and feasibility, ultimately to minimise the risk.
Preparing to Put in a Finance Offer
Before even considering making an offer on a development site, there are several crucial steps you must take to ensure the project is viable and attractive to lenders:
Financial Viability: First and foremost, you need to ensure that the financials stack up. A good rule of thumb is to aim for a minimum of a 20% return on cost basis after accounting for senior debt costs. This ensures that the project is not only profitable but also has a margin of safety in the event you’re hit with unforeseen costs.
Due Diligence: Conducting comprehensive due diligence is imperative. This involves assessing every aspect of the development to mitigate risks as much as possible. Key considerations include the feasibility of the project and the overall suitability of the site for development.
Accurate Build Costs: Estimating build costs accurately is critical. Rely on recent, comparable projects and consider using the same or similar contractors. Engage a quantity surveyor to help ensure your estimates are robust. Additionally, conducting competitor market research is crucial – visiting local competitor sites can provide insights and help you position your project competitively.
Exit Strategy: A realistic and achievable exit strategy is essential. This involves considering the location, demand, asset type, and price point of the development. Whether you plan to sell units individually, refinance and hold the property, or execute a block sale to an investment fund, your exit strategy should be clear and well-documented. At this stage, it’s also advisable to seek funding expertise to ensure the project is fundable. Securing indicative terms from a lender before putting in an offer can save time and prevent potential setbacks later.
Securing Funding: The Initial Steps
Once you’ve carried out the necessary preparations and are ready to put in an offer, the next step is to secure indicative terms from a lender. To do this, you’ll need to provide the following information:
Development/Client CV: A detailed overview of your experience and track record in development.
Asset & Liability Statement: A statement outlining your financial position.
Development Financial Appraisal: This should include a schedule of accommodation showing GDV (Gross Development Value), build costs and breakdown of the land acquisition costs.
Contractor Proposals: Information on the contractor proposed under the JCT Design and Build contract or construction management agreement.
Site Details: Address of the site and details of the structure, including Special Purpose Vehicle (SPV) details, directors, and shareholder percentages.
With this information, the lender can provide indicative terms which outline the potential funding structure and costs.
Post-Offer Funding Process
Once your offer is accepted by the vendor and you decide to proceed with the lender’s terms, you enter the next stage of the funding process. This phase involves more detailed scrutiny and additional documentation:
Pre-Commencement Conditions: Address any pre-commencement conditions, such as whether work has already begun and any outstanding site de-risk reports, including ground investigation and utility reports.
Affordable Housing Considerations: If your project involves affordable housing, ensure that there is interest from potential buyers and that Heads of Terms (HOTs) are in place.
Detailed Contractor Proposals: Provide detailed specifications, including elevation drawings, floor layouts, site layouts, and phasing considerations.
Build Methodology and Cost Analysis: Include details on the build methodology (e.g., traditional, timber frame, steel frame) and a comprehensive contract sum analysis, broken down by package.
Project and Build Program: Outline the project timeline and the roles of the professional team, including previous working relationships and Professional Indemnity (PI) insurance details.
Exit Strategy: Reiterate your exit strategy, whether it’s an open market sale, refinance and hold, or a block sale to an investment fund.
Lender Due Diligence and Approval
Once all the required information is submitted, the lender will seek credit committee approval. If approved, funding will be subject to various due diligence processes:
Valuation: A RICS ‘Red Book’ valuation will assess the Gross Development Value (GDV) and land residual valuation.
Quantity Surveyor Review: The lender’s quantity surveyor will assess the build costs and overall project feasibility.
Legal Due Diligence: The lender’s legal team will conduct thorough due diligence to ensure all legal aspects are in order.
This process typically takes 4-6 weeks but could extend to 12 weeks depending on complexity. All due diligence costs are borne by the borrower, making it crucial to be well-prepared and organised. It is key that all parties add value to ensure a smooth transaction process.
The journey from putting in an offer to securing funding is a detailed and meticulous process that requires thorough preparation and thought. By using the points outlined above, you can ensure that your property development project is not only viable but also attractive to lenders which can be key to getting deals over the line. Having an attractive project is really beneficial as it helps bring the lenders on board, build relationships and prospers future business.
If you would like to discuss raising development finance, reach out for a no obligation chat.
Dave Symondson – Director
DevBrok
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