- By Michael Ivey
- Nov 26, 2022
Access to development funding is an integral part of the property development process given the industry is so capital intensive. Capital has become harder to secure since the global financial crisis and in more recent times an unprecedented construction boom. Now more than ever it’s become important for developers to have a clear understanding on how to secure funding and satisfy the requirements of lenders.
With the contributions of Michael Ivey, C.E.O and partner at Mitchell Brandtman and Matthew Royal, co-founder of Development Finance Partners; The Urban Developer has investigated five key tips for securing development funding.
1. Communicate Early And Do Your Due Diligence
Before a you secure funding for your next property development, it’s key to communicate with your financier and their preferred quantity surveyor (QS) to ensure that your bank or lender has comfort over the building team, construction and other costs and the agreement between the parties.
“It’s about looking at the proposed development to identify potential areas of risk including consideration of the risk mitigation strategies in place to inform the potential financier. With this in mind, it makes sense to instigate early engagement between your financier and the QS to ensure the development structure, team and contract platforms align with that supported by potential Financiers. Such engagement should provide the most efficient outcome from a cost and time perspective,” says Ivey.
The Due Diligence process will also increase your credibility with financiers and position you as less of a risk in your lender’s’ eyes.
“For the development program to be valuable, it must be evidence-, valuation- and QS-based and supported. Through obtaining valuer and QS support the key assumptions of your feasibility and cashflow become more bankable in the future, which greatly reduces your financing risks later,” says Royal.
2. Have A Clear Understanding Of Both Your Financier’s And Your Own Finances
Understanding the capabilities of those who’ll be financing your development is equally as important as understanding your own financial capabilities. Know where you’re money is coming from and how it is placed within the marketplace.
“Financiers appetite for funding moves in waves and are influenced by factors outside of just your deal. If a financier is ‘overweight’ in a particular sector, location, product type, or with a particular contractor – you may not get funding, no matter how solid your project is. This appetite will invariably be different for different financiers at different times. Certain banks are not lending for residential, but if you have an income producing investment style asset such as a child-care, or retail project or similar your funding options may be broader,” says Ivey.
Whilst it is critically important to assess the lending potential and circumstances of your financier, you cannot hide your own personal circumstances.
“It is obviously at this point that you should be working closely with your financial advisor or banker to understand how you are going to finance the entirety of the development from beginning to end relative to personal financial capacity,” says Royal.
3. Get Your Numbers Right
Having a clear understanding of your project budget and how you’re going to spend both your and your financier’s money is imperative to mitigating risk. Ivey says there are four key tips to executing this;
The most effective project savings are usually achieved early in the design phase when changes cost less to implement. Early feedback on construction costs, design options, and value management are critical.
Ensure you prepare a diligent, holistic budget which addresses all facets of the development. Whilst the developers ability to fund equity contributions and/or particular elements of the development is normal, financiers are focussed on a deeper understanding of where the developer’s funds are being spent across the broader cost centres.
Your budget should highlight areas often missed or not clearly identified. For example, works outside the boundary, utility connection fees and specialist consultants fees.
Banks are looking closely at feasibilities and in recognition of the low margin environment are looking in particular at contingency. You need to know what that means for you and your project – talk to your QS.
4. Coordinate With Care; The Team You Build Can Either Win Or Lose You The Game
Consulting with the right professionals will inevitably contribute a large part to the success of a development. Selecting who you choose to consult with, in particular your Contractor is a process that requires careful consideration.
“Despite the opinion of many in what has appeared to be a development boom, the contracting game has not been an overly profitable one for most. Whilst typically not the only reason, the low margin environment most contractors have operated in for some time now has contributed to a recent and ongoing list of contractors who are struggling, or worse failing, and consequently the banks are watching this space extremely closely. So the “right” contractor may win or lose you a preferred funding deal,” says Ivey.
Which may present a particularly challenging issue for developers as there are only a limited number of preferred contractors.
“As preferred contractors in good standing with the banks become harder to find, developers are resorting to locking them in earlier by using early engagement models such as Design and Construct (D&C) contracts. These of course come with their own challenges but when set up well can provide the required outcome in a challenging market.”
According to Ivey, it is important to remember that contractors must run a profitable business to provide a successful development outcome, so squeezing margin from contractors just to make your project feasibility viable is not necessarily the right approach.
‘Always leave a bit on the table for the next guy,” he says.
Selecting the right contractor is a much more efficient process with the advice and assistance of a good development manager.
“It is at this point where you begin to realise the extent of ‘what you don’t know’ and can appreciate the value of the advice and guidance that an experienced development manager can provide you with.
A development manager can assist you to build a ‘Development Program’. A sound development program is the fundamental core to any successful development company especially where there are heightened elements of complexity. Other key team members you’ll need to consider are; a specialist property finance advisor, a town planner and a property solicitor,” says Royal.
5. Have Your Information Ready
Financiers can appear to be asking for a lot of information, however if utilised efficiently this part of the process can be vital for double checking the facts. They provide the opportunity for a second set of eyes looking over your project via the financiers QS and valuer.
“The list of information requested by the QS may look daunting but by preparing early and assisting the QS in obtaining and understanding the information the outcome becomes a value added service. Typically it will take up to 10 days from receipt of all information to understand and analyse, so if time is of the essence then plan ahead,” says Ivey.