Assets with higher reputational risk

Are there sufficient development funding options available for assets with higher reputational risk?

According to Development Finance Today’s latest poll, 83% of respondents state that there are currently not sufficient development funding options available for assets with higher reputational risk.

Such assets include nurseries, care homes, assisted living, hospitals as well as schools.

With this in mind, Development Finance Today set out to ask brokers, lenders and developers in the development finance sector whether they agreed with the survey results and how the risks associated could be mitigated.

Tom Lee, head of structured finance at Pure Commercial Finance, explained that while he agreed with the results of the survey, the requirement would change greatly depending on whether the assets would be trading on completion or treated as an investment and subsequently let to a third party.

Tom stated that there are more and more funders gaining “comfort” with these types of assets outside of traditional banks.

“A purpose-built care home with a strong end tenant taking on the lease can be deemed just as strong as an HMO or student property.”

Tom claimed that the concern for some funders in any sector where tenants are vulnerable —including care facilities and assisted living — is that the occupiers can be classed as “vulnerable parties” and could, therefore, be at risk of becoming homeless if repossession was implemented.

Chris Oatway, owner and founder of LDNfinance, said: “The development market certainly has the potential to grow as many niche areas are underserved at the moment, but I do not think this will particularly change in the short term.

“Over the past couple of years, lenders have become less aggressive in their lending, and although there have been new entrants into the market who are offering higher gearing, they have not widened the range of the type of the deals which they have to offer.”

Ellis Sher, co-founder and CEO at Maslow Capital, stated that costs are often higher for such assets due to the “specialist nature” of their operations.

“In care homes, for example, properties have to be constructed to guidelines set by regulation, including minimum room size, disability access wet rooms, minimum communal area as well as having to make allowances for specialist equipment, such as bedroom hoists, lifts that accommodate beds and commercial kitchens.
“While such costs can appear higher, one also has to balance the budget versus quality argument, with ongoing FF&E cape playing an important role in maintaining standards of the facility and, therefore, ultimately the asset value.”

Why do you think there are insufficient options?

Insufficient options

“Deals [for] care homes, hotels, nurseries etc can be very complex to structure, so having an experienced team [which has] a clear knowledge and understanding of the sector is key,” explained Deepesh Thakrar, senior director of debt finance at OakNorth.

“Unfortunately, very few lenders are willing to take the time to properly understand a business, meet the team, visit the site, structure a bespoke facility etc, which is why a lot of businesses in this space end up not being able to find the right debt finance option for their needs.”

David Higson, investment director at Blackfinch, also expressed doubts relating to assets with higher reputational risk, stating that these types of proposals could attract “higher costs” and a more “cautious” lending criteria.

“In lending for a business, such as a care home serving vulnerable people, no lender would wish to be responsible for either closing down a facility or putting it at risk.

“There would also be a responsibility for any insolvency practitioner required to manage the home if the security was enforced, which could create further reputational risk or cost.”

This year, Blackfinch has funded the development of a care home in the North West which will provide 36 beds for those with learning disabilities, in addition to the delivery of a bridging loan to provide accommodation for supported living for vulnerable adults in the West Midlands.

Ellis said: "It is difficult to predict 18-24 months out what that refinance market will look like what the acceptable leverage levels will be, and of course, how the business will actually trade upon opening.

“Simply put, there are easier assets on which lenders can deploy their capital in the development space.”

David added that in order to deal with these specialist markets effectively, familiarity with and an understanding of the regulatory framework and bodies, including the Care Quality Commission (CQC) and Homes England, will form part of the deal making.

“The role of the surveyor is also key.

“In funding a development, we ensure our monitoring surveyor has relevant experience in the sector [and we] also have demand for the asset verified by a specialist valuer and other organisations, including local councils.

“While sector specialisms aren’t mandatory, not all lenders will be willing to climb the learning curve required to become comfortable lending to more specialist sectors.

“Many prefer to operate solely in the residential sector [which] means that lenders with this experience have more opportunities, but also that borrowers have fewer options.”

He claimed that its central aim was “always” to confirm that there was a credible plan in place from an experienced management team, with a focus on a successful business and exit.

Why do some lenders not offer these options?


“Unfortunately, there are far too many reports of clients, patients or residents receiving poor service or being mistreated, and lending to such developments puts us at an unacceptably high risk of reputational damage by association,” said Richard Payne, director of development at Oblix Capital.

“While we have close involvement during the property development process, we have no influence on how the business is subsequently run, and the reputational risk by association after the development is finished is still too high.”

Richard added that although Oblix Capital may consider these lending options in the future, there are still “financial risks” related to this type of asset.

“Should the borrower default on their loan, the market liquidity for such an asset class is far less than the more conventional asset classes, such as residential,” he added.

What are the funding processes like for schemes with high reputational risk and what products would you like to see from lenders that you aren’t currently getting?

Funding processes

Joshua McGuinness, development consultant at QDTS Construction, explained that the developer was currently having difficulty securing funding from lenders for a purpose-built student accommodation scheme.

Since 2014, QDTS Construction has worked on numerous multi-disciplined and diverse new-build projects.

It focuses on delivering housing new builds, city-centre apartments, commercial developments, residential care homes in addition to development and fit-out.

“We are currently looking for finance for a project to redevelop a Grade II-listed building into purpose-built student accommodation,” said Joshua.

“I approached lenders who have no issue at all with funding our other residential schemes, but approximately 60% of them advised that while they could ‘look at it,’ they typically do not consider funding purpose-built student accommodation.”

Joshua added that the “burden” should be on the developer to demonstrate to lenders why their scheme should warrant funding.

He explained that this “mitigates risk” for everyone involved, but lenders should also be reviewing schemes on a “case-by-case basis”.

“In my opinion, despite the fact that on occasions we would like to see more openness from lenders in their willingness to fund schemes with a higher reputational risk, I place a high value on their opinion and use it as a risk mitigation mechanism when assessing a schemes viability.

“It is often too easy to work on the assumption that you will achieve an easy exit from a scheme at the outset, when in reality this is all too often not the case.”

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