Flexibility is the most important element for a successful developer. Being able to change and adapt with the market is vital if an investment project is to succeed, and in order to maintain flexibility a developer must always have one eye on their exit strategy. A developer that’s overly committed to a single project might well find themselves at the mercy of a shifting marketplace, and can easily miss out on lucrative opportunities that present themselves. Maintaining financial agility is key to staying competitive, and when developers need to move on from a project development exit finance can help them to fulfil their outstanding financial obligations.
Development exit finance is a useful tool that enables property developers to move on from a project that’s not quite complete, and helps to tie up the loose ends of their existing finances. While this can be a particularly helpful way of resolving a project that’s reached maturity, it’s not a “no-brainer” solution; as with any element of development finance, borrowers should carefully consider the implications of each financial product they take on and assess what impact it might have on their future financial position. Before committing to an exit finance package, it’s important that developers consult a qualified and experienced financial advisor, who will be able to offer impartial guidance on whether the loan terms are acceptable or not.
On the face of it, property development seems like a straightforward industry to work in; you take a plot of land, build something on it using borrowed money, then sell it for more than it cost you to make it. In theory, this is what property development all boils down to, but in practise it often gets a bit messier than that; for instance, a large development might be partially sold, but may still have several empty spaces on the market. Equally, the property may be largely completed but still requires a few finishing touches, and until these are put in place the property cannot be sold or mortgaged.
In situations such as these, it’s not really necessary to hang on to the development finance deal which was used to help construct the property in the first place. Generally speaking, development finance consists of a large package of capital that’s used to build everything from scratch, and as such comprises a high percentage of the property’s total value. Such a large loan may well be unnecessary when the project is to all intents and purposes completed, and developers stand to benefit by consolidating their borrowing into an exit finance loan instead.
For instance, let’s consider how a development that’s reached practical maturity might be rendered more profitable through the use of exit finance. A newly-built office building might have cost £20 million to construct, which has been sourced through development finance and bridging loans over the course of the project. The building has been finished and is fully prepared to accept tenants, and while the developers have managed to find buyers for most floors, there is still some space in the building for more. This puts the developer in an awkward situation, because they can’t fully repay their loans until they’ve found buyers for the entire property. While they’ve gained most of the capital they need to pay back their creditors, they’re unable to fully repay the loan, which means they’ll be unable to meet repayments when the loan term expires.
No developer wants to be unable to repay their loans, because this gives lenders the opportunity to repossess their assets (since development finance is a secured form of lending). Instead, seeking a refinance option allows developers to retain ownership of their assets whilst also satisfying their commitments to their lenders. Development exit finance fulfils an important role here because it enables developers to quickly satisfy their creditors, and can also minimise the cost of maintaining their loan. In the example above, the owner of the office block already has most of the money they need to complete repayments, and can pay back £15m of the £20m they owe. This means that they only need to seek a £5m loan, and since this only constitutes 25% of the value of the asset the loan is secured against they can expect to obtain an affordable rate on the loan.
Exit finance can be used in a constructive way, as outlined above, in order to maximise the profits that can be drawn from a property. However, exit finance also provides a method through which developers can withdraw from a project that’s proving unprofitable; by using exit finance to repay their lenders, a developer can shed their involvement in a project as and when they feel it’s necessary. This may be because the project is proving unprofitable, because the developer has been presented with a better opportunity, or because their business objectives have changed. In any case, having the option to depart from a project at will through the use of exit finance is invaluable for developers because it lets them cut their losses. Without development exit finance, developers would be tied to a project until its completion for better or for worse, which can prove highly unprofitable if circumstance change during development.
Exit finance provides an alternative option for developers, and means that they aren’t forced to commit to each project until it completes. If they were, developers would be much more reluctant to take on projects, because the costs of failure are much higher; a single failed project can easily sink an otherwise-successful developer if they’re forced to stay until the bitter end. While the costs of exiting a project before completion can be high, and an exit finance loan can be expensive to maintain, it presents developers with the invaluable ability to opt out of a project, and to consolidate the costs of a project that’s dragging on.
bridging.com is brought to you in partnership between FMG and Falbros.
Falbros Media Group (FMG) is registered in England, Registered Number 11085818.
Registered office: Metro House, Nothgate, Chichester, West Sussex, PO19 1BE.
Falbros Ltd is authorised and regulated by the Financial Conduct Authority under reference number 745807.
Registered office: 1 Mayfair Place, London, W1J 8AJ. Registered in England Number 8147460.