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Development Finance

Are some lenders asking the wrong question about developer experience?

Michael Clifford discusses the importance of looking beyond the number of schemes completed when assessing a developer’s experience.

Opinion
5 min read
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Are some lenders asking the wrong question about developer experience?
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One of the first questions a development lender will usually ask of a borrower is a simple one: how many schemes have they completed?

It’s an understandable question. A track record provides evidence that a borrower has taken a scheme from acquisition through construction to sale or refinance, but the number on its own tells us very little.

A developer who has completed 30 houses in Cheshire clearly has experience, but if their next project is a 100-unit apartment scheme in a city centre, how much of that experience is directly relevant? They may never have dealt with that type of build, that planning authority, that contractor base or the issues that can come with delivering a large apartment scheme in a constrained urban location.

Meanwhile, another borrower may have completed far fewer developments but have direct experience of that type of project, in that city, working with many of the same professionals and contractors. So, which is the more experienced developer?

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Experience needs context

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Too often, developer experience is treated as something that can be reduced to a number and the higher the number, the stronger the borrower appears.

There is clearly value in having completed developments before, but lenders need to look beyond a paper number and examine how relevant that experience is to the scheme they are being asked to fund.

There is another problem with judging experience by the number of completed schemes, as completion alone does not tell you what happened along the way.

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Our experience tells us that we want to understand much more about the projects a borrower has delivered. For example:

  • How did they perform against budget?
  • How did they manage the contractor?
  • What happened when costs increased or the programme changed?
  • How were sales handled?
  • Was the original exit achieved?
  • And, most importantly, what happened when something went wrong?

Almost every experienced developer will have dealt with a project that did not go exactly to plan, which is not necessarily a negative. In many cases, how somebody responded to a problem tells us more about them than a project where everything went smoothly.

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Development lending is not about assuming the original plan will be followed perfectly, it’s about understanding whether the borrower has the ability, judgement and support to respond when circumstances change.

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We appreciate this and as a lender, we build the contingency for this in our pricing approach, ensuring we align our interest with the borrower by offering a simple interest model, so there’s no compounding interest and the borrower profit is protected and doesn’t erode due to the effect of compounding. This provides a better base for constructive conversations, removes some time pressure and leads to better decision making.

The borrower is only part of the story

Lenders should also stop looking at the developer in isolation, as any development is a team effort.

A borrower may not personally have delivered a scheme of a particular size before, but that does not automatically make the project unsuitable for funding. An experienced contractor, project manager, quantity surveyor, architect and sales team can reduce many of the risks that come with a borrower moving up in scale or taking on a different type of development.

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This is especially important for SME developers. Inevitably, there will be occasions where good developers want to take on larger schemes. If lenders insist that every borrower must already have completed a development almost identical to the one they are proposing, it becomes very difficult for capable developers to grow. That does not mean ignoring experience, it means assessing each scheme on an individual basis.

A borrower taking a sensible step up, supported by people who have delivered comparable schemes before, can be a very different lending proposition from somebody attempting the same project without that support.

Good lending starts with what happens when the plan changes

A development finance facility should not simply be agreed, drawn and then reviewed from a distance until repayment.

We place a great deal of importance on staying close to borrowers throughout a development. That allows issues to be identified earlier and gives both sides a better chance of dealing with them before they become bigger problems. It also means thinking about the exit before the facility is completed.

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Where appropriate, we can structure development exits into the original funding arrangement so there is already a clear route forward if the borrower needs time to complete sales or move into the next stage of the project.

The lender and borrower should both want the same outcome, a completed scheme, an orderly exit and a commercially successful project.

Good development lending therefore involves much more than deciding whether a borrower passes an experience test at the start, it requires a funding structure that reflects how development actually works.

What has this borrower, together with the team around them, done that gives us confidence they can deliver this scheme and what happens if the original plan changes?

The answer to that tells a lender far more than a number ever will.

Michael Clifford is commercial director at District & County Investments

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