The need for development exit finance: 'Why wouldn't you want to be hedged against a changing market?'

Last week, Development Finance Today teamed up with Acre Lane Capital in a live event to discuss development exit finance.

As part of its weekly virtual roundtable series, Medianett’s managing director Caron Schreuder, along with Acre Lane’s CEO Ian Wilson, and managing director and head of risk Chris Pigden, hosted an hour-long discussion that centred on the requirement and provision of loans for developers seeking to refinance their existing facilities.

The panel also included George Eleftheriou, managing director at Real Finance; Kevin Gillham, private client adviser at City Finance Brokers; and James Lennon, director at Tapton Capital.

Looking at what has caused the surge in demand for the product, Ian noted significant growth in the wider development lending sector having a knock-on effect on the need for exit finance, as well as certain lenders in the market being inflexible.

He believes that the challenge in terms of exiting at present is two-fold: the pandemic’s impact on labour and materials which has lengthened build times; and some finance providers, particularly if they have bank lines and are therefore less able to be accommodating, are reluctant to extend facilities.

Acre Lane’s preference is to do so, rather than request borrowers to exit. “We’d rather keep the loans we have than force people into an exit — we don’t believe they are risky in the current environment,” he confirmed.

“I suspect that a number of lenders tend to shorten the length of the loan to increase the upfront, particularly for small developers who are looking for more of an upfront contribution than perhaps the loan can bear.”

Kevin highlighted that most lenders will only exit a development loan once it has reached practical completion (PC), which, considering the disruption faced last year, is not as useful as those that are offering genuine finish and exit finance. Earlier this year, Acre Lane unveiled three new development exit products.

Kevin criticised those lenders that deem loans to be in a worse position now than when they were originally funded. “They want their loans repaid and are [going about] it in quite an aggressive manner,” he claimed, “perhaps because of the way they are funded.”

George proffered that certain lenders’ funding lines may have “maxed out” and they want existing facilities repaid in order to finance their next projects.

According to James, a build term is typically estimated at 12 months, with the sales period set at around six. “Any delays on sales or in starting the build, or cost overruns, means that it inevitably goes past that point.”

He explained that having options open to developers, especially when it can end up being more cost effective, is a “saving grace”.

“With the rates that we’re seeing in development exit finance, it might be a viable exit route to go down [in order] to be on a cheaper facility once the sales [start to] go through.”

Chris commented that he is often “perplexed” as to why existing lenders do not want to continue the loan. “By and large, by the time these developments roll round to us, they are somewhat finished,” he said. “It seems to me that it is a basic refurb loan, in risk terms.”

Despite development exits commonly considered at PC, Ian shared that most of Acre Lane’s loans have been funded prior to this stage. “We haven’t run into any problems whatsoever as a result of taking the project on pre-PC.”

Using this type of product can also enable the developer to maximise their GDV during the additional six or 12 months.

“Obviously you need to do the maths on that and ensure that you don’t just hang on [indefinitely] for the best price, as the cost of finance over time could erode that profit,” George stated.

Chris highlighted that, for many developers, particularly as they near PC, the ability to take out extra money at the point of refinancing is the priority and something Acre Lane is looking at embedding in its own development loans in future, adding that increased cashflow is often more important than bringing the rate down.

“Our usual constraint is LTC, not GDV,” he expanded. “That is the tail that wags the dog — always.”

At the point developers reach PC, all of their execution risk is over, leaving just the threats around property valuation and the ability to sell, allowing Acre Lane to consider 95-100% LTC and release cash from the project.

“Most of my development clients are serial entrepreneurs, and nothing frustrates them more than missing out on a great opportunity to secure their next potential project — and that is so often down to cashflow,” Kevin added.

Chris also pointed out that this released equity can enable a developer to repay an expensive mezzanine loan.

Another advantage of adding the development exit facility onto the development loan — effectively blending the two products — is that there is one set of fees and documents, and certainty at inception. “Why wouldn’t you want to be hedged against a changing market?” Ian asked.

The full virtual roundtable can be watched below:

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