However, when speaking to potential clients and introducers, the conversation inevitably turns to headline interest rates.
Of course, the headline rate for a development loan facility is one of the key factors in determining which set of terms a developer should pursue, however, borrowers should appreciate that this is the beginning of a long relationship which will develop over the course of the project and which will most likely hit one or two bumps along the way, hence why several other factors should be considered.
The deliverability of the terms provided comes down to how well the originator understands their firm's risk appetite. There must be clear lines of communication and a well laid out credit process. No one likes last-minute changes and the ability of a lender to provide clarity and certainty of funding should not be overlooked.
The experience of the relationship manager and their support team needs to be considered, as once the acquisition or refinance completes, a developer needs continuous monthly support to ensure a smooth and timely drawdown process. Support teams that have a good understanding of difficulties that may arise during the build are prized assets. Delayed drawdowns and a lender’s inability to understand external factors affecting a development scheme are likely to have detrimental effects on the project’s profitability. An attractive headline rate cannot account for this.
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The ‘total cost of credit’ should be reviewed by the client taking into account several factors, such as:
- Borrowers should consider the solvency of the lender and the source of their funds? Is there a chance that the lender fails to finance the project to PC, thereby distressing the project?
- Arrangement fees: are they capitalised within the facility and compounded by monthly interest or paid by the borrower upfront?
- Margin over Libor or fixed: is this capitalised monthly or quarterly?
- Term of the facility: does it allow adequate time to mobilise the site, deliver the project and sell the units?
- Is there a minimum term required by the lender which may trigger a make-whole interest payment?
- Does the construction loan fund 100% of the costs of the development?
- How will the lender react in the event of default? Will they reprice the facility?
- Is the exit fee based on loan or GDV? Can this be ratcheted against early repayment?
- Non-utilisation fees?
- Potential extension fees?
- Default interest?
- Is the facility on demand?
- Does the proposed facility assume sales at PC or bullet repayment on maturity?
- Personal or corporate guarantees or non-recourse facility?
Borrowers need to look beyond the headline rate and consider the total cost of credit along with the future benefits of the relationship with their chosen lender. Having confidence in the lender’s ability to help grow the developer’s business is fundamental.