The importance of lender relationships and knowing the team behind the terms

Picking the right development finance lender is a critical decision at the start of any project, it’s the start of a relationship that will likely span a couple of years and at times (like most relationships) open conversations will need to be had because one of the many variables in the scheme might not necessarily be working out as hoped on day one. 

Rarely does a scheme map to the coordinates that were set out long before a spade went in the ground.   

So rather than being passed from pillar to post when a decision needs to be made and discussions had, there are unquantifiable benefits in both time and financial savings in knowing your lender. 

This can sometimes be overlooked when simply looking at an indicative term sheet.

A relationship built on trust, understanding and communication

In the intricate world of development finance, the relationship between lenders and borrowers plays a decisive role in the success of a property development project.

This dynamic, often wrongly seen purely in transactional terms, involves much more than the exchange of funds.

It is a relationship built on a base of trust, mutual understanding, and effective communication that often lasts beyond a single project and runs throughout the developer’s lifelong journey.

A lender you can trust

Trust forms the bedrock of the relationship between the lender and the property developer.

But trust must be seen as a two-way street, where both the lender and the borrower rely on the integrity, credibility and reliability of the other to ensure a successful financial partnership.

The need for trust is obvious from the lender’s perspective: trust begins with the confidence that the borrower will deliver the project inline with terms agreed, however it isn’t as simple as that (as any experienced developer will tell you) and when a lender closes a loan that’s when the actual relationship starts in earnest.

Trust and clear communication has to be paramount for borrowers too. Borrowers must trust that the lender will act in a fair and transparent manner.

This trust is often fostered when the lending team involved in a project before its even drawn and the indicative terms provided are the same team who are onsite, on the phone and in regular communication throughout the life of a project – they are experienced decision makers working with the developer throughout. 

Rather than post box lenders who approach lending as a mechanical tick-the-box exercise and when something does not necessarily fit, or a change occurs, layers of internal bureaucracy come into play, all of a sudden the journey take into a development loan can look very different once the project is underway.

The unsung hero of a great lender-borrower relationship: effective communication

Transparency also extends to the overly technical language used to explain loan conditions and the implications of various terms.

Fees hidden in footnotes and annexes or terms that are not clearly communicated can also erode trust and harm the lender-borrower relationship.

As a specialist lender, it is not uncommon for developers to come to us looking for something different that can’t be reflected in a term sheet, but carries as much, and if not more value, than a basic set of indictive terms.

The issuing of a term sheet is the opening of a door to a new relationship, but there is so much more behind this can be overlooked. 

At the bare minimum issuing terms that are fit for purpose and that can be delivered not walked back once costs have been incurred.

Transparency and integrity by avoiding headline-grabbing terms that can put a scheme under financial pressure at a later date.   

As always there is a commercial balance, but having these discussions early on is important. 

It has been a tumultuous 24 months in the market, cost of certain materials has been far from stable and sales, well they’ve been challenging, as the active buyer pool across the majority of price points has been impacted by one thing or another which we are all aware of. 

So it is no surprise that the value in relationship, trust and understanding really comes to the fore.  

A timely reminder that when looking at the next term sheet it might be worth engaging with the lender early to understand a bit more about the assumptions that have been made to generate the numbers and equally who are you going to be working with for the next few years.

David Alcock MRICS is managing director at BLEND