Overview
LocationUsed by us to distinguish where the property is that the loan will be made against. Lenders can be location agnostic, and believe that different locations should attract different Underwriting Criteria and pricing : Croydon, Surrey
LoanWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More Type : Development / Mezzanine
LoanWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More Size : £4.68m
Loan-to-ValueThe ratio of debt to property value, expressed as a percentage; for example a Borrower that obtains a Loan of £ 6,000,000, against a property value of £ 10,000,000, would be expressed as 60% LTV. : 89% LTCTypically used in Development Finance as a ratio, to measure the Loan granted in relation to the overall costs of a development project. Normally expressed as a percentage. Costs are split into Land Costs (purchase price of the site, SDLT, legal fees, etc.) and Build Costs (the build contract, QS, Architect, CIL, S106, etc.). A Lender will normally agree to advance a percentage of all of these costs. They will normally agree to include their own funding costs towards the total costs, as the interest and fees are normally rolled up (See Rolled-Up Interest). and 75% LTGDVTypically used in Development Finance as a ratio, to measure the Loan granted in relation to the overall end value of a development project. A Lender may offer 60% LTGDV and 80% LTC, and it is the lower of these two ratios that will determine the final loan size advanced. The Loan advance will include an allowance for Lender interest and fees as these are normally rolled up (See Rolled-Up Interest).
The Situation
Our client had purchased a site in Croydon with planning to build 32 apartments. They were involved in other development projectsThe Site or Property that a Developer wishes to improve or re-build, in order to add value. It is quite common for someone to refer to a 'Development' instead. at the same time, so equityThe difference between the debt and the asset value; the part that the Borrower actually owns. The equity value can increase in value over time, if debt is reduced and / or the property increases in value. The reverse can also happen. See Negative Equity. was short. Whilst they had the ability to call on investor monies to plug the gap, the cost of this money was too great to bear as it involved paying a profit shareNormally used by a business to incentivise employees and typically expressed as a percentage. In property transactions it could be the share of profit between equal or unequal partners in a JV scheme. Or, a Developer may offer their team a Profit Share if they perform to time or budget. We most often see it if a Developer is deemed by the Lender not to have the necessary experience for that particular scheme. Rather than not lend, the Lender may suggest that they incentivise the main building contractor via profit share..
The Challenge
The client has been involved in property for many years and was already a successful developerAn individual or entity that buys and improves property, or builds entirely new properties, that are typically sold at completion of the project., so experience wasn’t an issue. Satisfying the lendersA company or person that lends money to another. that there was enough bandwidth within the business and the financial resources to meet any unforeseen issues was the bigger problem.
This would have been the third site under development at the same time, and the client also had bids on two further sites.
The Outcome
Whilst the cost of mezzanine finance puts most people off, in this instance it was very easy to demonstrate to the client that it was more cost effective than their current model. By, replacing the more expensive equity loansWe use the term most in Development Finance, but it can apply to any property transaction. Where the purchaser or owner of an Asset funds part or all of the Deposit / Equity via a Loan from another party. In return the Lender is likely to charge an Interest Coupon and a Profit Share. they had sourced privately, the client was able to stretch his own equityThe difference between the debt and the asset value; the part that the Borrower actually owns. The equity value can increase in value over time, if debt is reduced and / or the property increases in value. The reverse can also happen. See Negative Equity. further and run multiple sites because he chose to, rather than because they were chasing the returns needed to repay their investors.
We used a senior lenderA company or person that lends money to another. and mezzanine lenderA company or person that lends money to another. that had worked together many times, and had an agreed ICDA contract governing the relationship between Lenders when there is more than one Lender lending against one security. It recognises the rights and rankings between those parties, particularly in the event of NPL. in place, as well as sharing professionals where they could. This meant we had a smooth loanWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More process and the professional costs were kept to a reasonable level as the lendersA company or person that lends money to another. agreed to share the same valuerInterchangeable with Surveyor. See Surveyor. and QSA person that calculates the amount of building materials needed for a Property Development, and also the cost of these materials. If you are borrowing to fund a development, the Lender will always appoint a QS. Borrowers will normally have their own QS as well, but sometimes on smaller schemes it is not deemed necessary as the Main Contractor may be experienced enough to fill this role instead..