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Sam Herd from Mint Property Finance, says as we proceed apace towards the end of the year, property Developer’s attention is turning to 2022 and the various light, medium and heavy works projects they have in the pipeline for 2022.
As such, it seems both timely and prudent to draw attention to problematic development finance loans that are sadly becoming increasingly prevalent in the industry.
And this problem centres on property valuation.
A valuation is a key requirement in determining what a property is currently worth, what the likely Gross Development Value (GDV) will be of a completed scheme, and therefore what amount of money a Developer can borrow to fund the works on a project.
However, some lenders in the marketplace are attracting new customers to development loans with seemingly attractive rates, when the development lending methodology that they are applying is often impenetrable for a borrower and not fit for purpose.
Following an initial property valuation, a GDV calculation and the agreement of a development works fund based on a Loan To Value (LTV), a lender has two choices for the release of development tranches.
One, a lender can apply an ongoing valuation methodology to fund the continuing works whereby funds are released on the back of demonstrable value added to the property by those works. If the value of the property has increased the lender will release subsequent monies to the borrower as a percentage of the increase in accordance with the LTV ratios agreed with the Developer.
Or two, a lender applies a more qualitative approach which will see each subsequent development finance tranche released on the back of monies spent on the project towards the ultimate, agreed works objective rather than the immediate value added.
Whilst this may seem like a nuanced difference in the administration of a loan, as Sam Herd from leading specialist finance lender Mint Property Finance explains, it’s a difference that is causing expensive and time-consuming problems for an increasing number of Developers.
Simply put, an ongoing valuation methodology may not always be the most appropriate approach when it comes to funding development works because in most cases the value of the property often decreases before the value increases, especially in the early days of a project. And similarly, once the property is wind- and water-tight, the value increases disproportionately to the amount spent on those works.
This means that a significant number of Developers who were initially attracted to seemingly low rates have to go down the expensive and time-consuming path of securing alternative finance part-way through a loan from another lender, one which takes a more pragmatic and qualitative approach to the ongoing release of funds.
Mint Property Finance is one such lender and the key to the business’s ongoing success in the funding of development projects is that if a borrower is either developing or refurbishing a property, an independent Monitoring Surveyor is appointed to act on the borrower’s behalf. His or her role is checking the cost of works as well as the quality of said works, to ensure the project is completed on time and on budget such that the property can be refinanced or sold in accordance with the pre-defined exit strategy.
The appointment of a Monitoring Surveyor to check the works is of huge importance to a project and is what differentiates Mint Property Finance from a great many other lenders, allowing the business to adopt a more pragmatic, qualitative methodology to the release of funds for works.
And it’s this point of difference which is particularly attractive to those developers with slightly less experience who appreciate the independence of the Monitoring Surveyor and their ability to collaborate and assist with any issues, problems or delays that night arise.
So as we look forward to the holiday season and all the projects that 2022 has to offer, it’s worthy of note that not all lenders are the same and it’s of paramount importance that borrowers select one that’s fit for purpose when it comes to the funding of ongoing works within development finance loans.
Sam Herd
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