Development Finance: Cheap can also be expensive

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James BloomThe current lending market for deals at the smaller end of the development sector is fragmented and, while there are many lenders saying they will lend, very few actually are. This is the experience of James Bloom, Chief Executive of development lender Regentsmead, who explains that there are even lenders offering to fund projects without the ability to do so…

Certain bridging companies have entered the development lending arena in recent months, but some have arrived without the necessary skill set, experience and systems in place. These lenders are floundering in a market which is very different from the traditional bridging market.

In this era of the credit crunch and major liquidity problems, it is difficult at first glance to spot a well-funded, reputable lender from one that either doesn’t have sufficient funds to lend or one that will seek to underwrite a deal and change terms at a whim.

Regentsmead is a long-established, privately owned principal lender who lends only its own funds; we are seeing a massive upturn in enquiries, both generally and, in particular, where other lenders have let clients down, often right at the point of completion.

One such recent case involved a developer in the Midlands – Blossomfield Developments – who sought to borrow construction costs only on a site for three detached houses in a high quality residential location close to Birmingham. The developer was experienced and had put in substantial capital into the project in addition to holding excellent security. The developer had facilities agreed but was subsequently let down by three other lenders in the market, including one bridging company who had allocated funds elsewhere so had to withdraw at the point of completing the facility.

Two of the lenders had set unreasonable conditions on the borrower which were impossible to meet, so the facilities could never be drawn down.

This situation reminds me of a sign I once saw in a shop when I was younger which said ‘we offer credit if you are 90 and accompanied by both parents’. In other words, though lenders are saying they are lending, in some cases borrowers will never actually be able to draw down on the facility due to the nature of the terms offered.

Speaking about the completed deal, Paul Sura, Director of Blossomfield Developments Ltd, said:

“Regentsmead has proved a pioneering choice for our project which comprised of the erection of three, five-bedroom, newly built detached houses. Regentsmead is in a very powerful financial position which has been a colossal help in obtaining funding quickly. The level of service received was highly professional and efficient which facilitated in the process being completed within one week.”

Regentsmead is sometimes approached by brokers or clients who say they have been offered a cheaper headline rate than ours, asking whether we can match it. Our team always says the same to them: we offer market leading service and certainty, which will always cost more than shoddy service and uncertainty. When we make an offer it is binding and when we say we are going to do something we do, every time. Cheaper rates can often lead to wasted time and costs – it is better to make 80 per cent of something than 90 per cent of nothing!

In this market certainty is a rarity. Lenders will often attract clients in with the promise of a cheap headline rate and will then seek to change terms at some point during the transaction. It is vital to deal with the right principal lender who has substantial funds to ensure that time or costs are not wasted.

Although we are in very tough economic times, now is a time of great opportunity for those who are well funded. But, beware of the lure of supposedly lower priced deals – cheap can often turn out to be expensive!