Gordon Steele, AAB: Development project finance made easier
As the construction sector continues to adapt and ‘re-open’ from the lockdown measures imposed following the spread of COVID-19, property developers are beginning to navigate through the challenges that will be presented in the coming months.
We are beginning to see signs of easing following the significant downturn in activity experienced over recent months. Many of the funding challenges experienced by developers in these months were largely relieved by extended exclusivity agreements and payment holidays.
We are now beginning to see forward-funding and outright purchase agreements fall through as funders struggle to get comfortable with newly proposed construction timelines and are generally more conservative with cash.
Consequently, developers are looking beyond the traditional and textbook funding solutions to secure the correct funding structure for their development needs.
Having the correct funding structure is crucial to the successful delivery of residential or commercial property development. From a profitability and return on investment perspective, you must have the right finance in place to avoid unnecessary delays and high interest charges that eat into your cashflows. When working with construction and real-estate professionals, they tell us that this is one of the most complex areas of their businesses.
Often this is because one of the hurdles during the development is securing a financing package that is aligned with your development needs, whatever the situation; whether re-financing existing facilities for working capital purposes, or securing appropriate bridge financing to purchase developments ahead of proposed forward-funding arrangements.
Some top tips on overcoming this hurdle include:
Understand your development cashflows – crucial to securing the correct funding structure is understanding when you need to drawdown on a facility and how much you need access to at any one time. Too often we see developers agreeing to facilities that provide access to large drawdown amounts they simply do not require. As a result, many are hit with non-utilisation fees that eat unnecessarily into profits.
Do not fall into the trap of choosing the lowest financing cost provider. When securing funding, the end goal should not be solely to reduce the borrowing cost – what is important is the underlying relationship with the lender, their track record and sector development. We have all seen the reaction of mainstream lenders on occasions when the ‘music stops’ so look for a lender who understands the sector and the challenges that arise over the course of a development rather than a ‘one size fits all’ approach.
There are numerous financing solutions available, ranging from bridge loans to mezzanine finance / equity, from high net worth individuals, family offices and debt funds.
It is important to consider all of the options available and worth seeking advice from a trusted advisor who should not only guide you towards the option that is right for you, but also guide you through any complexities involved with raising finance including the positioning of a carefully thought through and presented funding prospectus.
This is particularly important to ensure that loans provided are correctly securitised and structured for tax efficiency.
Typically, these financing solutions are sought after in situations such as student accommodation, care homes and healthcare and out-of-town retail, in commercial and residential property as well as the private rented sector.