Securing the right size of loan that is both flexible enough and reasonably priced can be a headache at the best of times
Dani Netzer is associate director and senior underwriter at Blend Network
The availability of affordable and flexible finance is clearly one of the keys to the success of a build project. But is it just about getting the funding, or do developers also need to be selective about where they source their funding from?
Development projects – both commercial and residential – often require a highly tailored and niche type of finance that most lenders don’t (and can’t) provide. Securing the right size of loan that is both flexible enough and reasonably priced can be a headache at the best of times.
From a developer’s point of view, funds need to be rapidly available when needed, but not sitting unused at the bank accruing interest charges before materials need to be purchased or wages paid.
Securing this type of finance is not a walk in the park, especially when as a developer you are wearing multiple hats trying to solve the challenges that naturally come with property development.
So, developers can’t be blamed for focusing on getting the finance – sadly often overlooking the difference between different types of lenders. Yet this is a mistake that can cost developers dearly – not only in fees, but also in time and resources.
How flexible can a lender be?
One of the key reasons developers need to know and care about the source of their lender’s money is because source of funding impacts how flexible the lender can be with its money. Let’s look at why.
Each lender has a credit process and a set of credit criteria that they follow, and whether a loan is approved or not would normally be decided by the Credit Committee.
The Credit Committee is typically made up of senior management, senior underwriters, and stakeholders. The Credit Committee discusses the case and decide as to whether the loan should be issued.
The issue arises when a lender’s source of funding comes from an institution, such as a bank, an asset manager, or a pension fund, that has its own separate set of credit criteria. In that case, the borrower has to effectively go through two separate set of credit processes, which is not only time consuming and lengthy but also often frustrating because the loan may be approved on the basis of one set of credit processes but not on the basis of the second.
In contrast, a lender whose source of money comes from family offices or private capital is able to offer developers much more flexibility and speed of funding.
This is because the credit process is effectively reduced, not because the lender is not diligent in its underwriting process, but because the family office or private investor essentially ‘trusts’ the lender to do its job without having to approve the loan under its own set of separate credit processes.
This is why we believe that ‘family office money is the best source of money’ for borrowers.
Certain to complete
Another reason why developers need to know and care about the source of their lender’s money is because the last thing developers want is for their lender to pull the plug mid-project, leaving them out in the cold and unable to complete the scheme.
This happened in the height of the pandemic when many lenders lost their sole institutional funding line.
In contrast, the chances of pulling the plug on funding are reduced if the lender is backed by a broad and diverse source of family office capital, as opposed to being backed by a limited number of institutional funding lines.