A developer, on approaching a financier, often tries to get inside the financier’s mind to understand exactly what they’re likely to look for. The answer is that the financier sees all the individual aspects of a development as being not unlike an orchestra; one player out of tune can have a catastrophic effect, but one great soloist cannot carry the day. Whether it be the amenity of location, the design and quality of the project itself, or the depth of understanding of the surrounding market all aspects must come together harmoniously.
A Straightforward Approach
There are risks in property development. Financiers know this and can become frustrated by presentations if proponents either don’t identify or trivialise, the risks. For a developer seeking finance, it is far more beneficial to take a straightforward approach and present every aspect of the project at hand, good and bad.
As Dorado Property Director Thomas McClung reflects, “Every financier will conduct his or her own extensive due diligence. Dorado looks far more favourably on those who demonstrate to us up front that they’re prepared; that they’ve really thought about every aspect of their project, as opposed to uncovering things during our subsequent due diligence.”
To this end, providing a detailed understanding of the experience of the development team, plus the financial capacity of any other backer of a project is just as important as providing full details of the proposed design.
Transparency should also continue through development. Any concerns should be raised early from the developer, as it could be that the financier is able to offer strategic advice to help resolve them. For instance, two of Dorado Property’s founding directors have had careers in property development, so are sympathetic to the variety of challenges a project can face.
Assessing a Project
Development projects do not sit in isolation to their surrounds. They are designed and built with the needs of their future occupants and the surrounding landscape in mind and demonstrating a comprehensive, detailed picture of these factors is key when seeking finance.
For instance, while a location is often dealt with on a purely geographic basis with photos and maps of the area, as Dorado Director Tim Moore comments, “there is a lot to be learned by doing a full inventory of local amenity, walk scores and how the development relates to transport nodes.”
Developers seeking funding for a project must justify why it fits the location, and why the product mix suits the likely buyers and occupants. For instance, be they local investors, offshore investors, first home buyers, upgraders or downsizers, the intended occupiers of an apartment project will determine not only the mix of three-bed, two-bed, and one-bed apartments, but also drive the viability of any associated commercial space.
A Realistic Approach and Attention to Detail
One of the most important considerations a developer can have when applying for finance is the lasting impression cast on the financier of their capability to deliver the project. That impression is fundamentally shaped by the level of organisation and realism of the developer.
This begins from the moment a developer reaches out to a financier to seek funding. “Sometimes it’s unavoidable to seek funding urgently when let down by another financier,” Thomas McClung comments, “because that’s often the nature of development finance. However, the amount of time a developer leaves between applying for funding and needing those funds to be deployed into their project weighs on our perception of how organised they are likely to perform going forward.”
Almost every project will have some approvals in place but may require additional ones. It’s important to be very realistic about what approvals are required, what obstacles there might be to them being granted, and how long the process will take.
Feasibilities should be dynamic
Rather than providing only a static feasibility looking at overall income and costs, for instance, feasibilities should go into detail outlining the times on a month-by-month basis where costs occur and revenues flow – and be realistic in accounting for factors like contingencies, an area of feasibility that is often vastly underestimated. When assessing pre-sales, financiers need to see a clear strategy to lock in existing presales and finalise required presales. Finally, and essentially for any financier, there needs to be realistic consideration of every relevant aspect of the project to the financiers’ exit. As an example, Tim Moore comments, “it raises one’s eyebrows to see a development that is due to complete at the end of November and has a December cashflow showing completion of all settlements. This is just totally unrealistic.”
Ultimately, the extent to which a developer is realistic about timeframes or likely points of delay, plus the quality of upfront, realistic planning and contingencies is a good indication to any potential financier of the level of care likely to be put into the project throughout its lifetime, and reinforces a view that the project is one worth funding.
To discuss project finance with Tim Moore or Thomas McClung:
