The Construction sector has seen a sustained period of challenge with weak output experienced from Q2 2020. As a result, many of the funding challenges experienced by construction developers in these months were largely relieved by extended exclusivity agreements and payment holidays. However, we have seen forward-funding and out-right purchase agreements fall through as funders struggle to get comfortable with newly proposed construction timelines and a general conservation of cash.
Having the correct funding structure is crucial to the successful delivery of both residential or commercial property development. From a profitability and return on investment perspective, it is necessary to ensure you have the right finance in place to avoid unnecessary delays and high interest charges that diminish cash flows, accepting that this is one of the most complex areas of their businesses.
Often one of the difficult hurdles during the development is securing a financing package that is aligned with your development needs, whatever the situation. Whether it be re-financing existing facilities for working capital purposes or securing appropriate bridge financing to purchase developments ahead of proposed forward-funding arrangements. Some top tips on overcoming this hurdle include:
- Development cash flows – crucial to securing the correct funding structure is understanding when you need to drawdown on a facility and how much you need access. Too often developers agree to facilities that provide access to large drawdown amounts they simply do not require. As a result many are hit with non-utilisation fees that unnecessarily reduce profitability.
- Cheapest isn’t always best – when securing funding the end goal should not be solely to reduce the borrowing cost, important in these situations is the underlying relationship with the lender, their track record and sector development. We have all seen the reaction of mainstream lenders on occasions when the ‘music stops’ and therefore it is necessary to have a lender who understands the sector and challenges.
There are numerous financing solutions available ranging from bridge loans to mezzanine finance/equity, from high net worth individuals, family offices and debt funds. It is important to consider all of the options available, This is particularly important to ensure that loans provided are correctly securitised and structured in the most tax efficient manner are important considerations.
If you have any further questions, please contact Gordon Steele or your usual AAB contact.
You can find out more about AAB's Corporate Finance team here.