In this current climate, there are plenty of bridging lenders who advertise their speed of execution as a key USP of their business. A straightforward approval process and streamlined documentation are key factors for developers when choosing potential funding partners. So why don’t more development lenders advertise their speed of approval and execution to try to win business?
The general rule of thumb in development lending is that deals tend to close within six to eight weeks of agreement of terms, at least for the land or acquisition stage. Lenders have to write their credit applications, obtain the necessary internal approvals, instruct lawyers and valuers and undertake their own due diligence and KYC procedures while documentation is negotiated and agreed. These things can take time and can be compounded by a multitude of complications, such as multiple lenders, complex borrowing structures and title issues.
Understandably, statistics aren’t available to show average completion times for development transactions, but borrowers and introducers alike are always keen to understand a lender’s credit process and normal turnaround time (if there is such a thing in development finance) to check that it meets with the requirements of the project.
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While development lenders are normally quick to publicise new products, increased leverages, higher prices and new asset classes against which they will lend, refinements and enhancements to the credit and approval processes tend to take a back seat when competing with easily marketable ‘quick wins’.
The best possible debt terms are obviously important for developers, but this is irrelevant if it takes several weeks to get a positive outcome at credit and then months to document the deal. Developers seldom have the luxury of being able to spend months going through the negotiation and approvals process with lenders.
Delays in getting the required approvals and documentation can have serious knock-on effects for projects. Developments that are subject to pre-sale or pre-lease agreements upon completion will invariably have backstop dates by which the completed project must be delivered. Contractor tenders expire or increase, initial marketing buzz around a new development fades, legal costs mount, and – with student accommodation developments, for example – delays to closing the funding can put the first year’s income under serious threat.
Beaufort recently closed the financing of a student accommodation development in Sheffield over the Christmas and new year period in just nine days from agreement of terms and credit approval to drawdown. When all parties are pulling together and working towards a close, it shows what can be achieved.
Clearly, funding agreements and security need to be done properly, regulatory requirements need to be adhered to and credit approval processes are in place for a reason. However, lenders should constantly review these processes and look to enhance all aspects of their provision, not just leverage and pricing.