It is evident that there are several different “tiers” which residential development finance lenders can be separated into when it comes to senior debt. Although, it is not an exact science, and there will always be anomalies. As we move down through the tiers, the criteria become less defined and underwriting less rigid; this is reflected in the increasing cost of the money.
Tier 1: Institutional Lenders
This tier would include the High Street banks, and therefore the cheapest tier but the least “aggressive” in terms of loan to cost and indeed general appetite. It remains difficult to access such lenders for most developers and some banks will only consider schemes from existing clients, with a requirement for pre-sales or pre-lets. This tier is only for established property development companies however, in good financial standing and with no adverse credit.
Traits:
Will lend up to 50 per cent of GDV (or 60 per cent of costs)
Minimum loan Amount £500,000
Typical charges include a 2 per cent arrangement fee, interest at 4 per cent over base, and a 2 per cent exit fee (based on facility amount).
Tier 2: Merchant Banks
These are the specialist banks which have filled a large part of the gap which the High Streets left when they withdrew from the market. They are geographically restricted to “established” areas. Well established property development companies only, with a clean credit profile.
Traits:
Up to 55 per cent of GDV
Minimum loan £500,000
Typically 1.5 per cent, 7 per cent per annum, 1 per cent (based on GDV)
Tier 3: Specialist Lenders
This tier includes a number of family offices as well as independent financial organisations which accommodate the developers who fall short of ticking all the ‘bank’ boxes. Geographically less restricted and more sympathetic to speculative builds (within certain parameters). In addition to this, some mild adverse credit can be considered.
Traits:
Up to 65 per cent of GDV (or 80 per cent of costs)
Minimum loan amount £250,000
Typically 2 per cent, 8 per cent per annum, 2 per cent (based on GDV)
Tier 4: Private Lenders
This tier is very well populated currently by a variety of smaller operations, many of whom do not advertise their services. It also includes some of the bridging lenders who have specific development finance “products”. We have seen the most movement in this tier on deal structure and pricing, with no exit fees being charged by a number of providers. No geographical restrictions and non-status accepted.
Traits:
Up to 65 per cent of GDV
Minimum loan £100,000
Typically 2 per cent 0.95 per cent per month, varying exit fees.
Tier 5: Private Investors
HNW individuals who have development experience themselves, and will consider joint ventures, equity participation, and 100 per cent funding if the project suits. They will also consider much more speculative scenarios with non-status developers or those with very limited – or in some cases, no development experience.
Traits:
Up to 100 per cent of costs
Minimum loan £100,000
Costs vary
Some lenders might sit between the tiers or drift from tier-to-tier dependent on the deal specifics, but one thing that has become clear of late is that even the most established lenders are looking to broaden their geographical reach and negotiate to some extent. This is perhaps in light of increased competition and in an attempt to retain market share.
Given the vast array of funding options out there, it is now more important than ever that a borrower seeks the assistance of a very experienced broker, such as ourselves, to ensure that the very best and most appropriate deal is sourced.
Tier 1: Institutional Lenders
This tier would include the High Street banks, and therefore the cheapest tier but the least “aggressive” in terms of loan to cost and indeed general appetite. It remains difficult to access such lenders for most developers and some banks will only consider schemes from existing clients, with a requirement for pre-sales or pre-lets. This tier is only for established property development companies however, in good financial standing and with no adverse credit.
Traits:
Will lend up to 50 per cent of GDV (or 60 per cent of costs)
Minimum loan Amount £500,000
Typical charges include a 2 per cent arrangement fee, interest at 4 per cent over base, and a 2 per cent exit fee (based on facility amount).
Tier 2: Merchant Banks
These are the specialist banks which have filled a large part of the gap which the High Streets left when they withdrew from the market. They are geographically restricted to “established” areas. Well established property development companies only, with a clean credit profile.
Traits:
Up to 55 per cent of GDV
Minimum loan £500,000
Typically 1.5 per cent, 7 per cent per annum, 1 per cent (based on GDV)
Tier 3: Specialist Lenders
This tier includes a number of family offices as well as independent financial organisations which accommodate the developers who fall short of ticking all the ‘bank’ boxes. Geographically less restricted and more sympathetic to speculative builds (within certain parameters). In addition to this, some mild adverse credit can be considered.
Traits:
Up to 65 per cent of GDV (or 80 per cent of costs)
Minimum loan amount £250,000
Typically 2 per cent, 8 per cent per annum, 2 per cent (based on GDV)
Tier 4: Private Lenders
This tier is very well populated currently by a variety of smaller operations, many of whom do not advertise their services. It also includes some of the bridging lenders who have specific development finance “products”. We have seen the most movement in this tier on deal structure and pricing, with no exit fees being charged by a number of providers. No geographical restrictions and non-status accepted.
Traits:
Up to 65 per cent of GDV
Minimum loan £100,000
Typically 2 per cent 0.95 per cent per month, varying exit fees.
Tier 5: Private Investors
HNW individuals who have development experience themselves, and will consider joint ventures, equity participation, and 100 per cent funding if the project suits. They will also consider much more speculative scenarios with non-status developers or those with very limited – or in some cases, no development experience.
Traits:
Up to 100 per cent of costs
Minimum loan £100,000
Costs vary
Some lenders might sit between the tiers or drift from tier-to-tier dependent on the deal specifics, but one thing that has become clear of late is that even the most established lenders are looking to broaden their geographical reach and negotiate to some extent. This is perhaps in light of increased competition and in an attempt to retain market share.
Given the vast array of funding options out there, it is now more important than ever that a borrower seeks the assistance of a very experienced broker, such as ourselves, to ensure that the very best and most appropriate deal is sourced.
By John Waddicker of Positive Commercial Finance
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