Sourcing debt in the real estate market can be a daunting task and a workstream in its own right. As the real estate market becomes more volatile and increased interest rates negatively impact the viability of projects, funders are more selective as to what they will fund, and their criteria for advancing debt becomes more demanding.
Preparation is key and providing your funder with the right information about a project in a coherent manner will give you a much better chance of sourcing the right type of finance.
Depending on the finance that you require, there are a range of different funders with differing leverage levels, pricing and terms that can be accessed. Therefore, it is important to know who to target and what their requirements are across the spectrum of lenders, from pillar banks to alternative debt providers.
For a development site, information regarding zoning/planning is key and ensuring that the right team is in place to be able to deliver the project within the timeframe envisaged and in line with the budget presented. Preparing an accurate financial model and key information regarding the developer, contractor and delivery team will be important to all funders. Evidence of sales velocity in the area gives a lender confidence that the finished product will be absorbed by the market at a projected sales price. All the above information, packaged together in a clear, concise manner, will give funders confidence that you have undertaken your due diligence.
A contracted sale to landlord, Approved Housing Body (AHB) or the Land Development Agency (LDA) in the case of PRS, or in the case of commercial development, a pre-let of 60% or more of the space, can unlock access to senior debt funding from pillar banks. This can also potentially access higher leverage and lower pricing from alternative funders as the ultimate sales price has been agreed and the project has been de-risked to a certain extent from a lender’s perspective.
Investment funding is primarily dependant on building quality, location quality and tenant covenant strength. Accessing senior debt funding from pillar banks will be dependent on the cash flow from contracted leases as the senior debt market by in large, does not take on letting risk. The sustainability credentials of an investment asset are playing a bigger part of the senior debt funding decision, and a sustainability questionnaire is now commonplace with senior lenders. Expect that green terms and conditions will form part of a senior term sheet from pillar banks. Alternative funders will take a view on the letting risk, but this will result in higher pricing to reflect the lack of contracted income. As interest rates are elevated and the future path is uncertain, stress testing your cash flow position will give you a good indication as to the level of debt that your asset can sustain. Interest rate hedging is increasingly a precondition, and it is important that advisors with the specific tools and skills are included in these negotiations.
At certain points in the cycle, access to a senior debt provider may not be sufficient to fully fund a project or refinance an existing debt facility. This is where mezzanine finance can play a significant role. Mezzanine finance can bridge the gap between the equity available to the promoter and the senior debt available in the market. As mezzanine finance is structurally subordinate to senior debt, this type of funding is more expensive, and you need to be confident that the project can produce sufficient returns to absorb the additional cost. There are differing security requirements for mezzanine finance. An intercreditor agreement will be required between the senior lender and the mezzanine provider to ensure that all parties are satisfied regarding their legal standing.
There are also other types of funding available in the market that sit between equity and debt, such as preferential equity, which when appropriately utilised, can be an effective and efficient form of finance.
Given the challenges of raising debt at present, employing the services of a specialist debt advisor can help you secure the debt facility that you require. From funder identification, preparation of debt information memorandum/cashflow, securing an approved term sheet, negotiating a debt facility that protects a borrower from unnecessary expense and risk and devising an appropriate hedging strategy, we can help you through every step of your journey.
For more advice on raising debt, please contact us at email@example.com