Submitting a Stronger Property Development Finance Application
Submit a better application to your lender to get your finance application for property development off to a great start.
From navigating risks to getting to grips with your capital stack, here's everything you need to know about submitting the best possible property finance application.
Property development relies on secure funding to flourish. For most of us, the bank loan is the largest part of your capital stack and forms the foundations for your project to get underway. However, with a highly competitive market and lenders who scrutinise every decision based on risk versus reward, how can you as a developer make sure you get the right attention from lenders so you can reduce your own equity investment.
You have to know everything you can about your financial situation so you can approach a lender with confidence - or at least have a broker partner who can represent you and find the appropriate funding with the very best loan terms for you.
Lenders can be stringent with their requirements - they will generally assess every part of your application, which means they’ll be looking for evidence of past development performance, good credit, what work has already gone into the site (sweat equity) etc. As a developer looking for financing, you have to acknowledge the fact that the lender is going to try to build as complete a picture of your proposed project as they can.
With that in mind, here’s how you can get equipped to deal with lenders and help secure development loans in a way that suits your requirements and soothes the lender’s own hesitations around risk.
Build your own knowledge first
We’ve created a suite of resources here on our site around commercial property development finance. By reconsidering your finances from a ‘can I afford to build it?’ viewpoint to a ‘how will a lender view this project?’ you can align your commercial or residential development application with a lender’s main concerns.
All the information they require is available in the public domain in some way, but why make it harder for them? If you take the time to build an understanding of your own finances, you can gather the materials a lender may need to make their job easier and create a more positive relationship.
You could, for example, do some research into what a capital stack is and how your own stack will look. You can take this to the lender to show them that their risk is minimal and that private equity or unreliable investors have been minimised in the project.
Don’t be afraid to show your failings to the lender - they’ll find them out anyway. By being upfront from the beginning you get a chance to explain the background behind any bad financial history rather than having to argue from the back foot. In a world where almost any individual fact can be found rather easily, don’t try and hide from large financial institutions that can spell success or disaster for your development.
Go beyond the big lenders
Many developers stick to the larger banking institutions or experienced lenders in the construction sector. However, the growing world of finance includes many alternative lenders to those that were available just a decade ago.
Many of these alternative lenders and potential funding sources operate under non-traditional structures. This can make it hard for you as a developer to understand the offer put in front of you, which makes it valuable to choose a broker who can help you navigate this vast market and find funding options that suit your project and goals.
You may also find that combining a number of smaller lenders in your mezzanine debt can help get your project off the ground: but you also need to understand that doing so generally means a different repayment structure or sometimes even profit share on the completed building.
Having one main lender is not ideal - in fact, it exposes you to more risk by becoming reliant on a single source of capital. If you have a reputable lender with decades of history, that may not be as dangerous, but we all know that putting all of your ‘eggs in one basket’ is not good practice.
Investments are, by their very nature, risky. They can deliver returns or losses to the investor and therefore, anyone looking to get involved wants to weigh up those risks against their potential return. In property development finance, things are no different: there’s still plenty of risk despite the perceived ‘safety’ of property. Delays, accidents, shareholder disputes etc can all impact your project.
Show your lender that you have an idea of all the risks and how to manage them and you’ll give them more confidence in their investment. For example, have you already secured planning permission? Or is the planning application set for completion and submission after you secure the development finance loan? Do you or any of your partners have a strong credit score, or is this an area of concern for your lender? Like we said earlier, trying to hide anything from your lender is a bad idea and being proactive helps strengthen your case.
Work with a broker like Rangewell and we’ll help you map out your risks and create plans to mitigate them so that ultimately, you’ll approach a lender in as strong a position as possible. Bring a risk mitigation strategy with you and expect the lender to add their own insight.
Your partners and investors form part of that risk - so do any necessary due diligence on them to make sure they are trustworthy. This doesn’t apply solely to funding partners - your contractors and site staff will also impact your lender’s opinion. In fact, some lenders will favour certain contractors over others and may try to guide you to them.
Use Companies House, referrals and third-party reviews wherever possible to assess the businesses you choose to work with and incorporate these into your risk management strategy.
Providing some form of guarantee to your lender helps them take your application seriously. If you cannot offer a guarantee, consider instead how you could build a security package to help alleviate the lender’s risks - with something such as charges over property you already own, other assets or cash on account.
Speak to Rangewell before your lender so we can walk you through guarantees and security packages and how they may affect your application. By offering certain securities you may be able to get a better rate and make your project more profitable.
Getting in front of lenders is a battle in itself - so why give yourself a disadvantage by not using Rangewell? Choose us as your broker partner and we’ll work through the whole-of-market to secure the best funding packages available for your property development project.