Episode 5: Developer Diaries with Ben Wilson - Financing Development Deals
May 22, 2023
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Ben is joined by Rick Hollingsworth, Senior Structured Finance Manager at Octane Capital. They discuss financing property development deals, including the benefits of being a cash buyer, challenges faced by first-time developers, bridging and development finance compared to traditional mortgages, the level of control in the unregulated finance market, understanding security and legal fees, and tips for new developers in financing deals.
Financing property development can be done through various options such as cash, joint ventures, or borrowing from family and friends.
Bridging and development finance are priced based on loan-to-value ratio, creditworthiness, and project complexity.
Lenders consider a first-time developer's overall track record, involvement of experienced partners, and project details when assessing their eligibility for financing.
Transparency and open communication between lenders and borrowers are crucial for resolving issues and finding favorable outcomes.
Deep dives
Overview of the Property Market
The podcast episode begins with a discussion on the current state of the property market. The speaker mentions a slight slowdown in market activity and a softening of prices, particularly in the first-time buyer market. The speaker also highlights the return of 100% mortgages, which are seen as somewhat overhyped and limited in availability. The increase in interest rates is also mentioned, with the speaker noting that while rates have risen, they are still historically in a reasonable range.
Different Ways to Finance Property
The podcast then delves into the various ways to finance property. Cash financing is discussed as the ideal option, but not always feasible. Joint ventures and borrowing from family or friends are mentioned as potential alternatives. The conversation then shifts to bridging and development finance, with a focus on how these types of loans are priced based on factors such as loan-to-value ratio, creditworthiness, and project complexity. In terms of fees, arrangement fees for unregulated finance are typically between 1% and 2.5%, and legal fees are mentioned as an additional cost.
Considerations for First-Time Developers
The podcast addresses the question of whether first-time developers can access financing. While experience is a factor, it is noted that lenders take a holistic approach, considering the borrower's overall track record, involvement of experienced partners, and the specific project details. It is emphasized that having a sound business plan, professional team, and realistic expectations are key in securing financing as a first-time developer.
Treatment of Interest and Fees
The discussion then covers how interest and fees are handled in bridging and development finance. It is explained that interest can be rolled up into the loan in certain scenarios, such as when refurbishments are being funded and future value is anticipated. This helps to improve cash flow for borrowers, as they do not have to make regular interest payments. The role of asset managers in evaluating and approving drawdowns is mentioned, highlighting the efficiency and speed of the process.
The Importance of Communication and Openness
One key takeaway from this podcast episode is the importance of open communication between lenders and borrowers. Being transparent about issues and challenges that arise during a project can lead to more favorable outcomes. It is crucial for borrowers to disclose problems early on and work with lenders to find solutions.
Surrounding Yourself with Experience
For new developers, it is advised to surround oneself with experienced professionals and seek advice from them. Engaging the services of a finance broker can be particularly beneficial as they can provide guidance, access to a wide range of lenders, and help navigate the finance options available.
Learning Through Experience
Both in finance and property development, the consensus is that learning can only truly occur through hands-on experience. While knowledge from books and formal education is valuable, it is in practice that developers gain the most understanding and growth.
In this episode Ben is joined by Rick Hollingsworth, Senior Structured Finance Manager at Octane Capital. Together they discuss all things finance related, including: how to borrow money as a first time developer, the difference between bridging and development finance, why cash isn’t always king and how to maximise your return on capital.
Rick has worked in the finance industry for over two decades and brings a huge amount of experience to the conversation, shining a light on one of the most important parts of the property development process.
