A familiar problem for developers is being unable to commit equity to all of the developments they have the opportunity to start. This is usually a reflection of the economic cycle when opportunities can outweigh liquidity.
This may be because they have committed their funds in other developments, or they do not want to use their own money in the transaction. What providers of 100% loan to cost (LTC) funding are offering is a more equity friendly alternative to senior debt or stretched senior debt, but with a profit share to reflect the additional risk associated with lending 100% loan to cost.
100% LTC funding can be used for speculative residential developments, student accommodation or commercial developments. Office to residential developments and detached/semi-detached houses are both well suited to the internal rate of return (IRR) model that lenders use.
Lenders who fund 100% of development costs are usually small by comparison to retail banks, and are invariably led by an individual who used to be a developer, or has a longstanding experience of development projects. There are a range of lending structures these funders use; from one individual providing all the cash as a debt loan, to one primary investor supported by minority investors via a joint venture agreement, with a priority profit for the lender. There are usually two components, an interest rate applied against drawn funds and a profit share, sometimes structured as an exit fee.
The traditional model of an arrangement fee, interest rate and exit fee isn't usually utilised.
The lenders will approach each transaction as if it was their own, which benefits both the developer and the lender. They will look to ensure construction costs are in line with realistic market norms, and that projects provide upwards of a 20% profit on cost. Most will take some geographical risk and some may even back first time developers. Demand from the end buyers of the completed property is fundamental.
Loans can vary from £500,000 to £10,000,000, with larger projects possible on a deal by deal basis. Interest rates applied on drawn funds are around 5 - 12% per annum, which are rolled up into the facility, and payable on drawdown. Profit shares vary on a deal by deal basis, with a minimum lender percentage being 30%, to a maximum of 60%. Some of our providers permit any additional upside in addition to the day one projected net profit, to be retained solely by the developer.
100% development funding is usually a loan and not a traditional joint venture. Unless the project experiences difficulties and a default is experienced, the lender's involvement is purely that of a lender. The lender will agree the terms of the facility, and lend from their company to a special purpose vehicle (SPV). The developer will own and control the SPV and the cash flow in line with the monthly drawdown parameters. In most cases, no personal or corporate guarantees (PG's) are required, and no personal security is required to be pledged. In some cases if the risk is above average then a PG may be required. A debenture over the SPV would be required as normal.
Our role in projects of this nature takes one of two forms:
1. Finance Brokerage service: to facilitate the introduction to the lender, assist with the collation of documentation and completion of application forms and then to provide consultancy services to support the borrower through the process.
2. Debt Advisory service: a more hands-on approach than the brokerage service which involves; drafting of citing paper and information memorandum, term sheet and facility documentation reviews, negotiation of the covenants, advice on how to optimise the capital structure, guidance regarding the lender underwriting process and how to navigate pitfalls, assembly of the professional team and support securing a contractor, and helping to structure the cash flow and transaction.
Our success fees can be included in the development facility so the developer does not need to settle fees from their own resources.
At Conduit Finance, we have been delivering innovative sources of finance for developers since 2007.
Contact Jamie Davidson to find out how you can exploit dynamic debt for development.
Jamie@ConduitFinance.com | 0131 564 0172 | 07919 863 034