Key Issues for Lenders on Construction Projects

Project Lending

Structuring projects to make them more acceptable to lenders significantly improves the chances of getting them off the ground. Lenders of development finance primarily want certainty (and as few surprises as possible).

The lender is just as interested as the borrower in the successful delivery of the project, as it is only through successful delivery that the lender will see its loan repaid. However, as the lender has no direct means of exerting influence over the project to ensure its success, it must build in as much protection as possible through the setting up of the project and the loan facility at the outset.

The primary task for the lender’s development monitor is to identify key risks: those that are material enough to adversely affect the successful completion of the project. The development monitor needs to be pragmatic in considering proportionality and context.

The lender will want as much development and construction risk as possible to be eliminated or mitigated before it starts to fund. The following key points usually need to be addressed before lending for the construction phase of a project begins:

  • All borrower equity needs to be fully invested into the project to ensure that it is the developer’s money, and not the lender’s, that is being spent in the early stages of the project when the potential for risks to materialise is greater.
  • Planning permission needs to be in full force and effect and free from legal challenge. Pre-commencement conditions should be cleared.
  • The borrower should be able to demonstrate progress in clearing conditions and satisfying obligations (financial and other) attached to Section 106 and any other planning agreements.
  • The development budget needs to include all relevant costs, as any costs not captured in the agreed budget at the outset will not be able to be drawn from the loan facility as the project progresses.
  • The budget will need to be fully funded i.e. the total sum of borrower equity and lender debt must be sufficient to cover all of the development costs. Throughout the project there will need to be enough left to draw under the loan facility to cover the costs of completing the works. There can be no funding shortfall.
  • Contingency allowances need to be appropriate for the type, size and complexity of the project.
  • There should be adequate performance security provisions (bonds, guarantees etc.) included in the building contract, and step-in provisions for the lender should be included in the building contract and the key professional appointments.
  • The lender will need to see evidence that any potential rights of light infringements have been adequately dealt with, either through formal settlement agreements or taking out specialist rights of light insurance.

Working with a development monitor with an in-depth understanding of lender requirements, as well as a track record of successfully advising lenders on a wide range of projects, will enable a proactive relationship between the lender and borrower which works to everyone’s advantage.

To find out more about our Development Monitoring service visit our website page.