Corporate Finance Associates Blog

As usual our posts on this blog are reflecting our efforts to satisfy all of our clients in the most appropriate way despite what seems to be going on around us.  This one was prompted by a comment from an architect at a breakfast meeting I was at today when he mentioned the number of single house building developments he is working on have soared.

We are often asked via our introducers and indeed via the enquiries on our website to help arrange funding for residential development projects and the first question we always ask is ”where is the project located?” – The answer often determines the level of support that the UK lenders are prepared to give.

The title says it all, there is indeed a huge portion of the UK that is north of Watford, but to the vast majority of the lenders that have set their stall out to support the UK development finance market, it might as well be another planet.  Admittedly, the money seems to emanate from the South East and inside the M25 it appears that nothing can go wrong, are they being short sighted or just prudent?

On a recent exercise on a fairly chunky development proposition in the West Midlands, which is not quite the end of the world, we used the details of those current lenders in the UK, that have said they support development funding, gleaned from the latest copy of ‘The finance Book’ to find out whether they would even consider the application.  The result – out of 28 lenders approached, only 2 were willing to quote anything near reasonable terms for the business with the high street lenders being particularly unwilling.  The main response was “it is too far away”.

I don’t know the numbers but it wouldn’t surprise me if more people lived and worked ‘North of Watford’ than south of there, and they all have to live somewhere, so come on folks, the numbers might not be so big, but the market is, and the argument is always there that a range of smaller development projects across a wider series of locations does mean that the lenders are not putting all their eggs in one Country (Greece) basket.

If you do have a small residential development (Up to say 10 houses) ‘North of Watford’ do get in touch, because we now know who wants to play.  You can contact us here.

Blog articles are usually representative of what is currently on the radar with our clients and this one is no different – How many people actually read the small print?

The issue seems to be more prevalent at the moment as the relationships between lenders and their borrowers seem to turn sour faster than ever.  Realistically however the relationship has probably been going the wrong way for quite a while, and it is like your car, ignore those niggling sounds and one day something will let go and it’s the AA to the rescue.

It is when things don’t work with lending arrangements that lenders are relying even more on some of the things they were less concerned with in the past.  Three principle areas come to mind:

• Financial covenants associated with a loan
• Personal guarantees
• All Monies clauses

Let’s look at the first one – Many commercial (as opposed to Buy to Let – B2L) mortgages and borrowing facilities have covenants relating to loan serviceability, tenancies, loan to value and the production of timely Management Information (MI) lost in the pages of conditions associated with the facility.  When times are good lenders often overlook these, with markets tighter than they were and a lot of valuations being lower than when the money was taken in the first place, these are now being vigorously enforced.

We are getting new clients coming to us because their own bank want them to reduce their borrowing because the property has down valued, but I hear some say, how do they know, well the concept of desktop valuations have always been there, it doesn’t take a rocket scientist to ask the original valuer for their comments on your property even though you think they have never been back.

Others are now finding that MI they haven’t been providing is now being chased, and if a business is on top of things it should have them anyway, so sometimes a blessing in disguise, but the retained profits (or lack of) in your business could worry some lenders.

Changed the tenancy? Maybe your borrower should have been told, some B2L lenders are now insisting they are advised at every change of tenancy, and that could be every 6 months in some cases.

What about the second area – Personal Guarantees (PG’s) – If you run a limited company expect to give them, it is rare unless the directors of the company don’t own enough shares to control the business, that you will get away without providing them, and to be fair it is an acknowledgement on the director’s part that they are prepared to support the borrowing in the first place because it is usually the lender who has put more into the project than the borrower.  In the runaway ‘noughties’ PG’s were rarely considered as a risk indeed a lot of folk signed them without getting the independent advice that they should have done prior to giving them.

When the facility goes wrong, the lender can and do call their money in, so be wary of facilities that have an end date on them (how many developers do we know who have built their developments out and can’t sell or refinance them?), or covenants that could cause the dreaded ‘Event of Default’ and allow them to repossess or appoint a Law of Property Act receiver to collect the rents, because when they do and ultimately crystallise the amount of the debt, they will be coming to the Guarantors for the inevitable shortfall.

Finally, what’s an ‘All Monies Clause’ – simply put somewhere in the depths of the mortgage small print most lenders include this short bit of wording linking ALL debts and liabilities across the lenders various arms in the event of a default, and it can collapse a perfectly well functioning facility if another part of the associated facilities go wrong.  So whilst this is just an example, if you have your mortgage with a bank on your business or commercial premises, a series of B2L loans with that bank’s subsidiaries, and overdraft and maybe even a credit card with the same group and one goes wrong, it can cause an event of default with them all.  As we say avoid as much as you can putting all your eggs, both personal and business, into one basket because the chances are you will never fully be in control of that basket’s handles.

So, all I would say is look at the small print, it may not go away if it is a condition of a loan, just understand what you are signing up for and what will be the implications if you can’t adhere to them – You might lose the lot!

If your business is in this situation or you know of one to which this applies, do get in touch and we will do our best to help them.

In the pre-Credit Crunch days there were two essential ways to finance a development project, go with a bank who would usually lend up to 65% of the land value and up to 65% of the build costs drawn down in stages as the development progressed, or secondly go with a specialist lender who would lend up to 60% of the Gross Developed Value (GDV), often resulting in less input from the borrower and very often 100% of the build cost covered.

In the former case, it was great if you had the funds, most developers didn’t as their money was still tied up in the last development that was now being sold, in the latter case, these forward thinking lenders made development funding a much easier proposition.

Well we have the Credit Crunch, and a lot of the GDV lenders either closed their books (some of them having Icelandic parentage) or took a step back to see what the market would bring, and the high street banks just refused to sanction new deals at all, but would not announce to the marketplace that they no longer had an appetite for this sector. Out of all this however there remains some specialists who still know what they are doing and can still help with the smaller projects.

We are now 3 years on and after the previous years where large developers were shedding completed stock, by bulk sales or heavy discounts, and closing up other ‘in progress’ sites after making them wind and water tight, we have seen a  return to a low level of ‘normality’, as in certain parts of the country work has started once again in earnest.

The lending climate has changed however, the GDV lenders are few and far between but will look at smaller residential deals (very few lenders at all are looking at commercial builds unless they are either pre-sold or pre-let to a reputable end user) up to say £5m. They limit their total advance to about 50 – 55% of the GDV and expect the developer to exhaust his own funds first before drawing on theirs. Interest rates are higher often as high as 9% p.a. and if the interest is to be rolled into the deal rather than separately serviced, the LTV limit has to allow for payment of these as well.

There is however further light at the end of the tunnel for very sound, house based, development funding in the SE of the country and in certain circumstances for very tasty propositions we can achieve as high as 70% of the GDV.  At this level funds will run out quickly and I would expect these private funds to be very selective in what they wish to support.

The banks are still there in a minor way but are not keen to lend in excess of 50% of the land costs, and a similar amount of the build costs and there will always be the need to jump through an extensive array of ‘hoops’ first, so don’t expect them to be major players for quite a time to come.

If you have a project that would benefit from our input why not give us a call or visit our contact page.