Securing financing for a residential property development can be a complex and competitive process. Whether you’re a seasoned developer or just starting out, understanding the key factors that lenders consider when approving a residential property loan is crucial to increasing your chances of success.
In this blog, we’ll explore the main criteria lenders like us here at BLG Development Finance look at, including project viability, developer experience and financial health. While considerations will vary lender to lender, in general these are the sorts of things you should be aware of in terms of how residential development finance lenders will determine if they want to progress with your proposal.
1. Project viability
One of the most important factors a lender will evaluate is the viability of the project itself. Lenders need to be confident that the development will be completed on time, within budget, will generate the expected returns and be profitable for the developer. To accurately forecast this viability, us lenders will look at:
Feasibility studies and market research
Lenders expect a thorough feasibility study, which includes market research to show there’s demand for the project. This could include analysis of local property prices, rental yields and demand for housing in the area. The more convincing the research, the higher the chance of securing funding.
Planning permissions and approvals
Lenders will want confirmation that the development has the necessary planning approvals in place, and that the project complies with any local regulations. If planning permission is still pending, the lender is like to be more cautious to accept the terms of the project, or may require a higher level of equity before lending.
Cost estimates and budgeting
Lenders will want to understand the total cost of the development, including land acquisition, construction and contingency costs. We would also assess whether these costs are realistic and backed by a detailed budget. A comprehensive breakdown helps reassure lenders that the project won’t run over budget, which could increase the risk of loan default.
Exit strategy
While you may not want to consider what might happen if your residential development plan encounters some unforeseen obstacles, lenders do! We want to know how and when the loan will be repaid, even if the project may not look like it will be completed. So you should have a clear exit strategy in place such as selling the completed homes, renting them out for long-term income or even refinancing once the project is finally completed.
2. Developer experience and track record
As experienced residential development finance lenders, we understand the importance of a proven track record. Lenders prefer to work with developers who have a history of successful projects, making the developer’s experience and track record a critical factor in their decision-making process. Key aspects lenders consider include:
Previous projects
The only way to learn is by doing, which is why lenders like ourselves will review your development history to assess whether you have successfully completed similar projects in the past. Having a thorough portfolio of completed residential developments shows lenders that you understand the process, timelines and challenges involved in fulfilling your obligations in meeting lender criteria and paying back your loans, ideally the project will be similar to one you have already completed in terms of size and complexity.
Developer reputation
A developer’s reputation within the industry can have an influence of some lender’s decision-making. Lenders may seek references from past partners, contractors or investors to verify your ability, as the developer, to meet deadlines and deliver a quality project.
Experience with financing
A developer’s familiarity with securing funding and managing large-scale projects is a significant factor. Developers who have navigated the financial and regulatory challenges of previous projects are typically seen as lower risk, and thus more likely to receive their proposed financing.
3. Financial health and stability
The financial health and stability of both the developer and the development company are crucial factors lenders assess when deciding whether to approve a loan, with lenders typically examining the following:
Personal and business credit history
The creditworthiness of a developer, in terms of both their personal and business credit scores, will be looked at by lenders. A solid credit history demonstrates financial responsibility and the ability to repay loans. A poor credit history or significant will likely raise concerns for lenders.
Equity contribution
Developers are usually required to contribute a percentage of their own equity to their project, typically between 20 – 30%, however this will vary depending on which lender you go with. We will want to see that you have made a sizable financial commitment and are therefore actively invested in the success of the project. So, by putting in more equity, the lower the perceived risk by the lender.
Liquidity and cash flow
Lenders will scrutinise your available liquidity and cash flow to ensure you can manage unexpected expenses or delays during the construction process. A developer with a strong cash flow is more likely to weather any financial challenges that arise during the project.
Financial projections and business plan
A well-prepared business plan outlining projected revenues, expenses and profitability plays a key role in alleviating lender concerns about preparedness and diligence, increasing the likelihood of securing funding. Financial projections should be grounded in realistic assumptions, not inflated ideals and should align with long-term market conditions.
4. Loan-to-Value (LTV) ratio
The Loan-to-Value (LTV) ratio is another crucial factor in securing funding, as this represents the proportion of the total project cost that a lender is willing to finance. A lower LTV ratio is generally seen as less risky, as it means developers are investing a larger share of their own capital in the project.
Lenders will typically prefer an LTV ratio of around 50 -70 % for development loans, however this can vary depending on many of the above points including the project’s risk profile, the developer’s experience and the policies of the lender. For more complex or high-risk developments, we may require a lower LTV ratio or higher interest rates to compensate.
Conclusion
When applying for a residential property development loan, lenders evaluate factors such as project viability, the developer’s experience, financial health, and the LTV ratio. Addressing these thoroughly in your application and ensuring your project is well-planned can therefore greatly improve your chances of securing funding.
