Experience Matters in Specialist Property Finance

The cheapest advertised rate is rarely the whole story

Property finance, has changed significantly over the past decade. While the traditional high-street banks remain an important source of funding, an increasingly diverse specialist lending market now provides property investors and developers with access to funding structures that simply may not fit conventional lending criteria.

Bridging finance, refurbishment loans, development finance, development exit facilities, commercial mortgages and structured property finance can all provide solutions where traditional lending is either unavailable, too slow or simply unsuitable.

Having more lenders to choose from does not make obtaining finance easier  -

In many cases, it makes experience more important.

Specialist property lending is rarely about entering a few numbers into a system and waiting for a computer to provide an answer. The lender needs to understand the property, the borrower, the project, the experience behind it, how the loan will be repaid and, crucially, what could go wrong. That means the way a transaction is structured, presented and positioned can have a significant influence on the finance ultimately available. This is where experienced property finance advice can make a real difference, and using brokers such as Golden Trust Capital.

High-street lending and specialist lending are very different markets

Mainstream lenders typically need lending decisions to fall within clearly defined policies and affordability, credit and security parameters. That works well for straightforward transactions.

But property investment and development are not always straightforward; Consider a few examples:

• A developer purchasing a site before planning conditions have been fully discharged
  

• An investor buying an unmortgageable property at auction
  

• A landlord acquiring a property requiring significant refurbishment
  

• A developer approaching practical completion but needing additional time before units are sold
  

• A borrower purchasing below market value but needing to complete quickly.
  

• A commercial property with an unusual tenant or lease structure
  

• A development where additional security could significantly improve the funding structure
  

• A borrower with a strong property track record but circumstances that do not fit a mainstream lender's standard criteria
  

These transactions cannot always be properly assessed by looking at a credit score or loan-to-value percentage alone. Specialist lenders therefore often take a more individual approach.

The question becomes less “Does this borrower fit the computer model?” and more > “Does this transaction make commercial sense, and can we structure it in a way that works for both borrower and lender?” That distinction is extremely important.

Specialist lenders can look at the story behind the numbers

Human-led underwriting allows a lender to look beyond one particular element of an application:

• A development company may have relatively modest accounts because profits have continually been reinvested into new projects.
  

• A borrower may need a high level of funding against the purchase price but own another property that could be offered as additional security.
  

• A property may currently be in poor condition and therefore unsuitable for a conventional mortgage, but the borrower may have a clear refurbishment programme that could substantially improve both its condition and value.

A borrower may, for example, have experienced a historic credit problem but subsequently completed several profitable property developments. None of these situations automatically makes a transaction good or bad; What matters is understanding the complete picture. And that is where both lender and broker experience become important.

Not every specialist lender wants the same deal
Two lenders offering apparently similar bridging or development products can have very different appetites.

One of the biggest misconceptions surrounding property finance,

is that specialist lenders are broadly interchangeable; They are not.

• One lender may be particularly comfortable with heavy refurbishment.
  

• Another may prefer experienced developers undertaking ground-up construction.
  

• Another may favour London and the South East.
  

• Another might have greater appetite for commercial property, mixed-use assets or land.
  

• Some lenders may be comfortable considering adverse credit where the explanation is reasonable.
  

• Others may place considerably more importance on the borrower's balance sheet.
  

• Some will lend heavily against cost.
  

• Others will concentrate primarily on the value of the completed development.
  

• Some may consider additional security. Others may not.
  

The headline interest rate therefore tells only a small part of the story; There is a skill in knowing which lender is likely to understand and want a particular transaction before the application is submitted.

The way a finance application is presented matters

A strong property finance proposal should enable a lender to quickly understand what is being requested and why the transaction makes sense; Depending on the transaction, that could include:

• The borrower
  

• Who is borrowing the money?
  

• What experience do they have?
  

• What similar projects have they completed?
  

The property

• What is being purchased or refinanced?
  

• What is its current value and condition?
  

• Are there planning, title, construction or occupancy considerations?
  

The transaction

• What is the purchase price?
  

• How much funding is required?
  

• Where is the borrower's contribution coming from?
  

The development or refurbishment

• What works are proposed?
  

• How much will they cost?
  

• What contingency has been allowed?
  

• How long should the work take?
  

The completed value

• What evidence supports the expected Gross Development Value or post-works valuation?

The exit strategy

• How will the loan eventually be repaid?
  

• Will the property be sold?
  

• Will the development be refinanced onto a longer-term facility?
  

• Is there sufficient time and financial headroom if the exit takes longer than anticipated?
  

These questions seem straightforward, but presenting them properly can make a considerable difference. A lender receiving an incomplete application may see uncertainty and risk. The same transaction, presented with a clear explanation, supporting information and a realistic exit strategy, may look very different.

Experience can also help determine how the deal should be structured

Finding a lender is only part of the job.

• The structure of the borrowing can be equally important.
• For example, should interest be serviced monthly or retained within the facility?
• Could additional security reduce the borrower's required cash contribution?
• Would a bridging facility followed by a development loan provide greater flexibility?
• Should a completed project remain on development finance while properties are being sold, or could a development exit facility reduce financing costs?
• Would refinancing onto a buy-to-let or commercial mortgage provide a more appropriate long-term solution?
• Should a borrower maximise leverage, or would accepting a slightly smaller loan result in a significantly more attractive rate and overall cost?
• These decisions should be considered in the context of the entire project rather than simply chasing the largest available loan.

Cheapest rate does not always mean the cheapest finance

Property borrowers understandably focus on interest rates, they should, but comparing specialist property finance purely by interest rate can be misleading; The true cost of borrowing can also include:

• arrangement fees
  

• exit fees
  

• valuation costs
  

• legal costs
  

• monitoring or quantity-surveyor fees
  

• broker fees
  

• minimum interest periods
  

• retained interest
  

• extension charges
  

• drawdown conditions
  

• early repayment provisions
  

There is also another cost that can be considerably greater - 

Choosing a lender that cannot deliver when required.

Saving a fraction on the monthly interest rate is of little consolation if an auction purchase fails to complete, a development stops because a drawdown is delayed or a borrower loses an acquisition because funding was structured incorrectly. Cost matters. But so do certainty, speed and deliverability.

Development finance requires particularly careful structuring

Development finance illustrates this point perfectly. A lender is not simply advancing money against today's value of a property. It is assessing a project that may not yet exist and therefore needs to understand factors such as:

• Purchase price
  

• Current site value
  

• Planning permission
  

• Construction costs
  

• Professional fees
  

• Contingency
  

• Development programme
  

• Developer experience
  

• Projected Gross Development Value
  

• Loan-to-cost
  

• Loan-to-GDV
  

• The borrower's equity contribution
  

• The proposed exit
  

The strongest development finance solution is therefore not necessarily the lender advertising the lowest rate. It is the lender whose appetite, leverage and underwriting approach best match the development concerned.

The exit strategy should be considered before the loan begins

One of the most important aspects of short-term property finance is the exit.

• A bridge is temporary finance.
  

• Development finance is temporary finance.
  

• Eventually the lender needs to be repaid.
  

That repayment might come from the sale of the property, sale of completed units, refinancing onto a commercial mortgage, refinancing onto buy-to-let finance or replacing one facility with another. A credible exit should therefore be considered at the beginning of the transaction, not several weeks before the loan expires.

An experienced broker should be thinking several moves ahead.

• If the intended exit is refinancing, what are the likely criteria of the future lender?
  

• Will rental income support the anticipated debt?
  

• Could market conditions affect the valuation?
  

• If the exit is property sales, how quickly are comparable properties selling?
  

• What happens if sales take six months longer than expected?
  

A good finance structure should provide sufficient flexibility for the borrower to deal with the unexpected.

Why relationships still matter in property finance

Technology has transformed financial services and will continue to do so. It can make sourcing, documentation, analysis and communication considerably more efficient; But specialist property finance remains fundamentally a relationship-driven business.

An experienced broker who understands both the borrower and the lender can often identify potential issues before reaching underwriting.

Sometimes the important conversation with a lender is not:

“What rate can you offer?” It is “Here is the transaction, here is the issue, here is why it has arisen and here is how we propose to mitigate it. Would you be comfortable with that?” Having that discussion before submitting a full application can save considerable time.

Specialist finance brokers should do more than introduce a lender

• The role of a good broker should not simply be to forward an enquiry.
  

• It should be to understand the transaction first.
  

• That means asking questions.
  

• Why is the borrower acquiring the property?
  

• What is the long-term strategy?
  

• What could prevent the transaction completing?
  

• What level of equity is available?
  

• Could the structure be improved?
  

• What is the preferred exit?
  

• What is the fallback exit?
  

• How important is speed?
  

• Is maximum leverage more important than minimum cost?
  

Only after understanding these points can the most appropriate lenders be identified. This is particularly important in bridging, refurbishment, development and complex commercial property transactions, where seemingly small differences in lender criteria can materially change the outcome.

Experience is valuable when transactions are not straightforward

Almost anyone can source finance for a perfect borrower purchasing a conventional property at a conservative loan-to-value. The true test comes when the transaction is more complicated:

• A deadline is approaching.
  

• The property requires work.
  

• The borrower has an unusual income structure.
  

• Planning is involved.
  

• The development has changed.
  

• A previous lender has pulled out.
  

• Additional funding is required.
  

• The property does not meet conventional mortgage criteria.
  

• There is a complex exit.
  

These are precisely the circumstances in which knowledge of the specialist lending market can become particularly valuable.

The broker approach that adds value

As an example, Golden Trust Capital, their starting point is not:

“What is the cheapest loan?” yet “What is the borrower trying to achieve?”

Once the objective is understood, a broker can look at how the transaction might best be structured and which part of the specialist finance market is most suited to it. Whether the requirement involves bridging finance, refurbishment finance, development funding, commercial property finance or a more complex funding structure, the objective remains the same:

Understand the transaction. Structure it correctly.

Present it properly. Match it with the right source of capital.

Property finance is ultimately about enabling a transaction to happen, and when transactions become complicated, experience matters.

Speak to a Property Broking Expert

If you are considering a property acquisition, refinance, development or refurbishment project and would like to discuss the funding options available, speak to a broker before committing to a particular finance structure. An early conversation can often identify opportunities, potential problems and alternative funding structures before they become expensive issues later in the transaction.

This article has been written by Christopher May of Golden Trust Capital, and feel free to connect with him on Linkedin to discuss your unique property development opportunity.

The information contained in this article is intended for general information only and does not constitute financial or investment advice. Finance is subject to lender criteria, valuation, due diligence and individual circumstances