As anyone working within the development finance market knows, no two cases are ever the same.
One of the best aspects of this sector is the sheer variety of applications that we might handle on any given day, from the type of project the developer wants to take on to the developer’s own background and experience level.
However, I do think that when it comes to types of development finance cases, they generally fall into three main categories.
The lender’s dream
First of all, we have the guaranteed wins, the cases that honestly make your eyes light up when you see them.
With these cases, everything just makes sense – all of the pieces fit together perfectly.
The counterparties are just right, it’s clear that the borrower is onto a winner where they can turn a real profit, and the level of risk falls perfectly within your appetite as a lender.
These are the simple, straightforward deals which you dream about as a lender, and where you can even stretch the maximum gearing where needed, given the ingredients are all there for a successful deal.
In truth, however, relatively few cases fall into this category.
Bread and butter
Instead, the vast majority fall into the second type of deal, the ‘bread and butter’ cases.
I’d say that these account for probably 80% of the cases we see at Hampshire Trust Bank.
These deals overall make perfect sense, however there is a point or two that require attention and mitigation.
This is where quality brokers really come into their own. The best brokers, the ones who truly grasp development finance, will spot these potential issues early on and will seek to structure the deal accordingly.
These brokers understand how to package a case to give it the best possible chance of success, and can recognise the lenders who want to say yes, so long as certain points are ironed out.
The reality is that the lender will spot these wrinkles sooner or later. Sooner is better as this allows us to structure the deal correctly from the outset.
This way we will stick to the terms of the deal as long as the deal is supported by the professional reports during the due diligence stage.
Unfortunately, there are times when some enquiries come in with hidden gems that are not disclosed to the lender at early stage.
It’s not an ideal way to handle a case, as in all likelihood the lender will spot those potential issues, which can affect the initial terms offered to the borrower.
The dead horse
Finally, we have the worst type of case, the ones that tend to circle the market for months.
These cases are ridden with problems which mean that the lenders aren’t too keen on funding these, or if they will even consider it, that will mean reducing the gearing and/or upping the price of the loan.
It’s not uncommon for lenders to be presented with these cases by a range of different brokers – essentially the clients are just beating a dead horse for months on end, trying to make it work, and tasking different brokers with helping get them over the line.
That is not to say that these deals don’t have place on the market, however the target development finance providers might be limited to a very small range of specialist lenders who are prepared to price for risk.
It’s good to talk
While the property finance sector as a whole is one built on relationships, this is particularly true of development finance.
The reality is that when brokers and lenders establish a quality relationship, and communicate openly about cases, it’s far easier to find a solution.
Across our industry, for lenders and brokers alike, it’s important to build the knowledge and skillset that means we can swiftly spot the desirable cases that fall into the first two categories, as well as understand the ways in which we can mitigate against any potential issues with them.
Just as crucially, we all need to be aware of just how undesirable that third category of deal is for all parties.
By working in this way, we can deliver the best possible experience to the widest range of potential development finance borrowers, and in doing so develop the strong broker/lender relationships which can help us take this industry forward.
Uliana Kuzmis is deputy managing director of development finance at Hampshire Trust Bank
