By Ash Kendall - UK Originator
There appears to be a growing trend of borrowers looking to refinance a development before it is completed.
This could be due to multiple reasons – the current facility is expiring and the lender does not want to carry on; there have been cost overruns which the lender is unwilling or unable to fund, or because the borrower is looking for a discounted interest rate.
Developments can be challenging even under the best of circumstances, and a ground up development carries a different set of risks to refurbishment or conversion works, while new build extensions are slightly different again. Even the best planned development undertaken by the most experienced of developers can experience issues.
On refurbishments or conversions, there can be issues with the building, including underpinning requirements, asbestos, or structural issues with the property.
On ground up developments, there is ‘in-ground’ risk including potential contamination on brownfield sites – while all developments can suffer from the need to increase specifications on developments.
Issues with developments such as these, can result in cost overruns associated with the build and also cost overruns from time delays. Time delays can become a real issue when they extend beyond the term of the loan with the developer still building when the loan term runs out.
From a lender perspective, it is important to make sure the developer has the extra time needed to complete their development as this presents the best opportunity for a successful outcome for both the borrower and the lender.
Despite this, some lenders are unable to roll, or extend, their development loans, or may be unwilling to do so.
Across the market there is anecdotal evidence that some credit lines are tightening. Sometimes therefore, the best solution for a borrower can be to refinance the part-complete development with a new lender.
Lenders such as Fiduciam are happy to lend on part-complete developments, and we have on multiple occasions provided funding for this type of scheme both in the UK and abroad.
However, it is important the developer can show that the works to date are in good shape and that they have the ability to complete the remaining works.
If a developer wants to take this route, the new lender will want to check that the development works to date are compliant, with both planning permission and building regulations.
If you have a client in the situation of refinancing a part-built development therefore, it is wise to advise them to have a building surveyor and their architect ready to provide this evidence.
Often, a new lender will be happy to take this advice from the current lender’s monitoring surveyor.
The role of brokers has arguably never been more important than it is currently, in understanding who the savvy lenders are: which are the ones that truly understand what is involved in a development and have the financial strength to support the borrower.
While rate is important, what is more so is for a borrower to be with a flexible lender who understands the risks, can help a borrower to complete a development if they hit difficulties and who is flexible enough to ensure that they have a loan term that really is long enough for a project to be completed, no matter what unforeseen events may befall.
This article first appeared in: Mortgage Introducer