While the vast majority of our mortgage broking business revolves around individuals, we are often called upon by real estate developers to assist with their finances. There are numerous ways in which developers use short-term finance, for example, as a means of bridging the gap between exchange of contracts and formal completion of the transaction. The key to securing such finance is having sufficient assets available to act as collateral while also creating enough headroom to give lenders a degree of comfort. The greater the headroom between assets and liabilities the more chance of securing finance and the better the potential rate/terms.
This case study revolved around a luxury real estate developer seeking short-term development bridging finance for a period of time until a number of their developments completed. Like so many funding requirements we come across, on the surface, this seemed very much an open and shut case. They were a well-known property developer with an excellent reputation and proven track record, looking to secure short-term funding. However, while relatively straightforward it is our role to not only secure finance but also negotiate the best terms possible.
So, we had a well-known property developer involved in the luxury real estate market. They were looking for short-term funding to bridge the gap between the exchange of sale contracts and completion on several luxury developments. One of the keys with any fundraising exercise is to gather as much information about the client as possible, both historic and plans for the future. It was obvious that we would need to review the client’s finances before even approaching any lender about funding. We needed to understand the business model, plans for the future, current cash flow, required cash flow and ultimately how the debt would be serviced.
We come across many real estate developers who have numerous projects live at any one time. Therefore the need to secure short-term funding for cash flow issues is paramount and something they look at on a regular basis. The scenario was perfect for short-term bridging finance which can last anywhere from just a few days up to 12 months. However, we would probably be looking at an initial three-month term to account for any possible delays.
Client: Well-known luxury real estate developer
Development location: Central England
Type of funding: Short-term bridging loan
Level of funding: £250,000
Reason for funding: Bridging gap between exchange of sale contracts and completion
While the majority of our mortgage broking enquiries revolve around LTV ratios, this one was slightly different. The company was looking to secure short-term upfront funding covering completion on several luxury developments. As a consequence, we would need to look at additional company assets to use as collateral against the bridging finance. There was also a need to ensure that future cash flow would be more than enough to service the debt without impacting liquidity.
As we touched on above, the raising of finance against property is relatively simple, the greater the collateral available the more secure the loan and more favourable the terms. On numerous occasions, we come across clients who have significant assets they could use as collateral but often don’t even consider this option. In many cases, this can be the difference between securing finance and rejection, although the use of collateral does need to be considered in the wider context of the individual’s/company’s financial circumstances. After various discussions with this client, we had an in-depth understanding of their business, business model and the issues we would need to address prior to a funding application.
So, the issues in question were:-
Product: The client wanted the option to roll-up the interest costs and pay these at the end of the loan term.
Term: The client had a number of contracts due to complete within three months, however, wanted the option to extend the loan for a further three months at the end of the initial term in-case of any delays.
We know that property markets can change relatively quickly and until the money is actually in a seller’s bank it is by no means guaranteed. So, even though we knew that the business was extremely well-run, had strong cash flow and significant assets, additional collateral would be required. This works two ways; the lender has additional insurance over and above the client’s financial liability and the client is able to use their collateral to negotiate very competitive terms.
As an independent broker, we have access to more than 300 lenders spread right across the globe. We are neither tied to individual lenders or groups of lenders which gives us huge leverage when looking to negotiate competitive terms for client funding. While we are extremely strong in the traditional mortgage market, focusing mostly on multi-million-pound mortgages, we have a reputation for negotiating often complicated bespoke arrangements. Knowing which lenders to approach, how to approach them and the type of information they require can drastically reduce negotiating times. We operate in a world where time is money and this is especially true when it comes to short-term finance such as bridging loans.
Even though we were well aware of the incoming cash flows and the fact they would be more than sufficient to service the bridging loan debt, some lenders require a greater degree of certainty. Therefore, we were able to utilise a floating charge over the client’s assets with additional cast-iron guarantees from the management team. Even though the average delay between exchanging contracts and completion (i.e. receipt of funds) is anything from two weeks, it made sense to build in a degree of flexibility.
Short-term bridging loan: £250,000
Bridging loan term: Three months
Bridging loan rate: Fixed (payable on repayment)
Collateral: Floating charge over the company’s assets
Additional loan guarantors: Company principals
Optional loan extension: Three months
The key to this solution was the use of a floating charge over company assets and the introduction of a guarantor in the shape of company principals. It is also worth noting that the initial three-month term could be extended by a further three months if required. Even though the company fully expected to exchange and complete on the properties in question, this extension gives them the opportunity to use the cash flow to cover other transactions. The fact there was a floating charge ensured there was always sufficient assets to cover liabilities – even if the asset mix may change over time.
At this point, it is worth noting that the client initially approached us on Wednesday and by Friday the agreement was signed and the funds were available. This perfectly illustrates the opportunity to secure bridging finance in a very short space of time – so long as you have the relevant information and you are able to present the client’s situation in the best possible light.
As we touched on above, we regularly deal for ultra high net worth and high net worth individuals as well as companies operating in the real estate development field. This particular case study revolved around the common activity of refinancing short-term cash flow to secure immediate funding. This allows real estate developers to maintain healthy cash flow which is often used to fund other projects at differing stages of development.
When securing any type of funding it is essential to present the client’s financial situation in the best possible light and to the most relevant lenders. In this case study, we knew who to approach, how to approach them and the type of information they would require. As a consequence it took less than 72 hours to secure the finance, sign the agreements and have liquid funds available. If you ever find yourself in a similar situation we would welcome the opportunity to chat with you. Very often we will be able to put together a number of alternative solutions for your consideration. The addition of real-time market rates to each alternative allows you to compare and contrast cash flow as well as financial liabilities in the short, medium and longer term.
Maximising assets and finances is the key to securing favourable rates, terms and levels of finance. However, this must be done in a controlled manner without overstretching finances and cash flow.