Is a developer’s optimism a problem for lenders?


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Is a developer’s optimism a problem for lenders?

It was a pleasure to host our first roundtable of the year with MDA Consulting on Thursday 11 April 2024. It was another successful breakfast discussion at the Ivy City Garden where we explored strategies for completing developments on time and on budget. Our guests included debt advisers, funders, residential & commercial developers, project monitors, contractors, architects and lenders, with conversations flowing from developments, through to project monitoring and finally funding.

The general consensus is that the lending environment is gradually getting more benign and construction costs have stabilised but planning remains a long, expensive unpredictable process.

A main factor developers should always consider when approaching funders, is making sure enough funding is requested to complete the development, including a good level of contingency. Understandably, developers can be optimistic but it is generally seen as a red flag for the lenders if the developer keeps requesting an extension on the borrowing. To get a smooth development process, a lot more work needs to be done before going on site to get ‘all ducks in a row’. The design needs interrogation to ensure there aren’t delays and projects keep on budget.

From a lending perspective, it was mentioned that the senior market is still relatively strong. The mezzanine market is more difficult and the equity market has returned in the past six months.

Bringing it all together, it was agreed that developers and lenders need to work together when they start a project and improve communication. Both parties need experienced people on a scheme to ensure a development is set up properly. Communication is key. It’s crucial for developers to have strong lines of communication with their contracting team, project monitors and lenders. Lawyers can play an important role by flagging up when development lending structures don’t look fit for purpose, and this is something our teams at Newmanor Law and MDA are specialists at identifying at the initial stages of your transaction.