Large and Then Larger...

Posted by Alternative Bridging Corporation on 22nd March 2022 -

You need never be bored in the bridging world, it is constantly evolving. From the time when bridging meant relatively small loans for homeowners, change has been constant. Bridging loans now include commercial properties, development finance, overdrafts, exit loans and loans for refurbishment. In fact, every use of capital which can be secured on property.

And evolution is not limited to this wider offering but also includes size. Although some lenders are limited to loans up to £1M and others can accommodate £2M or even £5M, there is a growing demand for loans of up to £10M and even more and there is capacity available to satisfy them. But do not be fooled – larger bridging loans are a different breed and need to be treated accordingly.

First, requests for larger loans often involve more exotic properties – dilapidated country houses to become hotels, castles with land to develop golf resorts, agricultural land waiting (and waiting) for planning permission for residential development, industrial sites for waste management and so on. These are non-runners as they are too specialist for the bridging industry.

But large does not need to mean unusual or specialist. Often, large in money terms is quite reasonable in bricks and mortar. For example, a house on the Wentworth Estate or in Belgravia or Chelsea may be less than 10,000 square feet but can easily value at more than £20M or £30M. Similarly, a retail parade or tenanted office building is very often sufficiently valuable to provide excellent security for a large loan.

So, what is so special about large loans?

Surely they are the same as small loans but with more noughts? Not so! The skill set is quite different. Start with valuation, after all this is usually the key issue in underwriting any bridging loan.

Gathering together all the relevant data is essential, just an address and a contact number is not the answer. The valuer needs plans of the property, accurate information as to the current and proposed uses, spot-on information about any tenancies (this includes knowing the precise identity of the tenant), the repairing covenants, the unexpired period of the lease and any break clauses. The valuer will check the local authority planning portal and report on the approved use and, if planning is to be changed, or even tweaked, this will be considered against known local authority policies. If there is any asbestos in the building or other contamination, specialist reports will be required.

If it is a large, or even larger development loan, accurate information on gross development value, rate of sale, construction cost and the conditions in the planning permission are key. Here, the residual value will be the basis for the site value and five percent wrong on costs or revenue will throw up a widely inaccurate valuation. An under valuation can as easily destroy the opportunity as an over valuation can give a false promise to the lender.

The choice of valuer will not be a casual one. Experienced lenders know the specialities of the major firms – who understands student housing, the retail experts, which firm for industrial, the best for residential development and so on. Truly, one size does not fit all and the lender is unlikely to be influenced by the lowest fee or the shortest turnaround time. The lender will not only know who has the appropriate expertise but will have relationships with firms based on past experience.

Choice of the appropriate firm of solicitors is also important. The lender will know who they wish to instruct and although the deal will be led by one partner, he or she will have access to in-house specialists for queries relating to planning, taxation, etc. and construction law where building is involved. It would be helpful to the client for the broker to ensure a similarly qualified firm is instructed by the borrower.

Credit approval is unlikely to rely solely on the valuation for large loans. The lender will wish to understand the borrower’s knowledge and track record for the type of project they are undertaking and it will help considerably if the borrowing company has a good profit record and a balance sheet demonstrating reasonable net worth or, in the case of an SPV, there is a parent company or shareholders to give support.

Very often large loans will require an extended repayment period - say 18 or 24 months - and not every lender can offer this. Brokers do their clients no favours in committing to repayment (or refinance) in a shorter term than is necessary. Similarly, encouraging a lender to make a loan which is disproportionate in size to their loan portfolio will be counter-productive as it will extend the due diligence period and forever be in the spotlight in the lender’s reporting. We understand these dynamics because at ALTERNATIVE Bridging we have included larger loans in our portfolio for the past 30 years.

Historically, bridging loans did not involve close relationships between lender and borrower with most of the negotiation managed by the broker. With large loans, the broker has a vital role to play but the lender will also wish to establish a close working relationship with the borrower. The lender’s asset management department will in all probability come into play during the due diligence period and remain in close contact until repayment of the loan.

Up to now, I have focused on the hurdles – how to avoid or overcome them and how to satisfy lenders’ requirements, but surely there are positives? Of course there are! Importantly, borrowers who can justify taking a large loan will usually be more reliable and better organised and there will be less likelihood of the proposal aborting. Although brokers’ rates of commission may be reduced for larger loans, in pound terms the fee will be much more! What’s not to like?

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