Brian Rubins

executive chairman, Alternative Bridging Corporation

There remains a severe shortage of housing stock in the UK, and that means continued opportunity for developers. But how many brokers truly understand development finance?

The first question is how much can be borrowed. This will vary from lender to lender, but is unlikely to exceed the lower of 80 per cent of the total cost of the project or 65 per cent of the gross development value (the total of the projected sales values). There are loans for developers who need to borrow more, and although they are far less readily available, loans can be as high as 90 per cent of total cost. They are only for truly experienced developers, and will involve some element of profitsharing, such as a higher interest rate or an exit fee.

Development finance requires very detailed information to enable the lender to consider the proposal. Below are outlined what is essential if you wish an application to progress swiftly and efficiently.

Lenders will want a clear understanding of the prospective borrower. Who is it? Is it a company – and, if so, who are the beneficial owners? Or is it a partnership, or a single person? What experience does he, she, or it have of property development?

Lenders ideally look for borrowers to have successfully completed three previous transactions as developers, and so a summary of these projects should be part of the presentation.

If the principals do not have this experience, then what is their professional background? Is it as a building contractor or sub-contractor, architect, surveyor, or something similar? In these professions, what role have they played in residential development? The lender needs to know. Too often, there is confusion between having experience as a builder or as a developer, and this needs to be clearly defined.

It is not uncommon for the developer to also act as contractor, employing the sub-contractors directly, all in one company or in a separate inhouse construction company. In all circumstances the lender will wish to understand the construction procurement route and the nature of the contract. There are a number of different forms of contract, primarily JCT (Joint Contracts Tribunal), and they can include the design function, which is known as design and build.

There are lenders for those who are not experienced and wish to undertake their first small project, but then the gearing will be a little less generous and the pricing marginally higher. Often these small projects are for owneroccupiers building their dream homes, and as the borrower will live in the property, the loan will be regulated. Only a limited number of lenders offer regulated development finance.

Turning to the property to be developed, is it previously undeveloped (a greenfield site), or is there a redundant building to be demolished (a brownfield site)? If the latter, what was the previous use of the property? There may be contamination on a brownfield site, and, if so, this is a risk that will need careful professional management. For example, the redevelopment of a filling station site with a block of flats will probably require the tanks and hydrocarbons to be removed. This need not preclude the arrangement of a loan, but the extra construction cost must be allowed for.

The lender will wish to know details of the professional team – architect, engineer, quantity surveyor, and any other specialist advisers. Also, confirm whether planning permission for the project has been granted, and provide a copy of the consent and the approved plans. If these documents are not readily to hand, they can be sourced from the planning portal at the local authority. They are in the public realm and can be downloaded. It is also helpful to provide the lender with the local authority’s reference number so that the lender may access additional information as required.

Hopefully the developer will have employed a quantity surveyor to prepare a preliminary cost estimate. This, or a detailed estimate if there is to be separate contractor, will add credibility to the proposal and avoid subsequent misunderstandings or delay.

An important element of the presentation is establishing the end value of the project, the gross development value (GDV). Obviously the client will have carried out the relevant research and will be able to make it available. Preferably this will involve reference to comparable properties that have been sold, or, failing that, research into what else is available in the market and listed on Rightmove or Prime Location.

This is an information-gathering exercise that needs to be presented to the prospective lender in an orderly report, supported by the documents referred to plus an appraisal and a cash flow forecast, which should account for all of the costs and the estimated GDV. Do include an estimate of interest, purchase costs – for example, agents, solicitors, and stamp duty – and professional fees.

In the main, loans for development finance are larger than for bridging, and developers are continuously active, thus generating repeat business. Taking the trouble to understand the process, and presenting a professional proposal to the lender, will be generously rewarded time and time again.