Development finance - Toolkit to a successful funding journey

Posted by Krios Capital Partners on 11th March 2020 -

Development finance - Toolkit to a successful funding journey

Securing the finance requires a well defined strategy

A development finance process can sometimes be challenging due to lenders’ specific investment criteria. An assessment of the due-diligence requirements and a well-devised action plan are a must to ensure the success of the funding journey.

Initial due-diligence check-list should ideally include:

• Developer’s CV outlining past experience and track-record

• Developer/guarantor’s assets and liability statement

• Proposed development team

• Full property address

• Land purchase costs and or market value assessment

• Total build costs including professional fees

• S106 and CIL liability

• GDV supported by a valuation report or comparables analysis

• Schedule of accommodation

• Monthly cash flow forecast

• Build programme

• Length of term required

• Plans and drawings

• The total borrowing requirement and equity available

Development appraisal

Perception matters. This is your opportunity to introduce your scheme to potential lenders.

Key components should include:

• GDV split by units

• Total build costs

• Professional fees

• CIL and S106 (if applicable)

• Land purchase costs

• Marketing costs

Development team

Experience and track record are key in an increasingly risk averse environment. Lenders need to be convinced that the proposed execution has the requisite experience to deliver the scheme on time and within budget.

Project profitability

As a developer, you need to demonstrate your scheme is viable and, therefore, financeable. Most lenders will only consider deals with a profit on costs of minimum 25% (excl. financing costs).

Land costs: first rule: do not overpay for the land. One of the (quickest) methodologies to assess the price of a land is to benchmark the asset against comparable transactions in the area. What was the implied £ per unit paid for other similar deals? Apply the £/unit metric to your development to sense-check your offer price.

Build costs: Potential costs overrun is one of the main considerations for any lender. Two aspects will be assessed as part of the due-diligence process: a) robustness of your assumption, i.e. how does your estimate compare with similar schemes? and b) your ability to deliver the budget, i.e. how solid and experienced is your execution and development team?

GDV: How realistic and achievable are your assumptions? How do they compare vs. similar achieved selling prices? Ultimately, you want to avoid a situation where the GDV gets down-valued by the surveyor, hence impacting the scheme’s profitability, gearing level appetite and, in turn, increase your equity contribution.

Financing costs: One of the main drivers of your scheme’s profitability. Having a feel for the level of gearing and pricing are important to ensure the project’s profitability metrics (i.e. profit on costs, and expected equity returns) are in line with your internal hurdle rate whilst remaining within a level acceptable to lenders (minimum circa 15% post gearing).

Capital structure

Devising the capital stack is an essential part of your funding journey as it will ultimately dictate the quantum of equity on day 1. As a rule of thumb, the gross facility/gross debt includes three components: land loan, construction loan and financing costs. 100% of the build costs is usually covered by the facility. Your day 1 advance or land loan will be the delta between the gross facility, financing costs and the build costs. Therefore, your equity injection will be the amount required to complement the land loan to cover the purchase price.

Exit strategy

The most critical consideration for any lender. How do you intend to repay the loan? A realistic and well devised exit strategy is key to any funding exercise. Who will you be targeting? What is your fallback option in case the private sales do not materialise? That means looking at rental data and figuring out what your return is going to be and the potential lenders that would have appetite for a rental scheme.

At Krios Capital Partners, we can support you in devising a successful strategy and help you secure your development finance package.

If you would like to speak to us about a development finance requirement, please contact us at [email protected] or, alternatively, click on the button below.