Why do developers use brokers?

By Stirling PartnersDevelopment Finance

By Steve Leverton. Steve specialises in business finance and working with clients of all sizes from niche businesses to multi-million pound PLC’s. Operating successfully in any sector, Steve has long-standing clients in the retail, leisure and entertainment, higher education, manufacturing and property markets.

I’m often asked this question, and by bankers in particular. I understand, I was a banker once myself and was equally mystified at the time.

The fact is that not only do intelligent and capable developers use brokers, but they are increasingly more inclined to do so. There are good reasons for this:

  • Developers do ‘developments’. In the process of that they have to wear many hats in a challenging world. They outsource what they can, where it can be done well and cost-effectively. Finding development funding is a task that can be outsourced.
  • It is no longer as easy as just going to your established main bank. Firstly many of them no longer do development finance, and where they do they have very selective policies. Although you may be an excellent developer with a long track record with the bank, if the development itself doesn’t meet their criteria you may not get the backing you need.
  • The High Street banks that are active are very conservative and risk-averse. Understandably so because developments are risky propositions (things go wrong) and it takes highly skilled staff to manage the appraisal and underwriting involved. With the need for additional capital provision (from the regulatory framework), the risk aspects, the need for specialist staff and training, why would a High Street bank be keen to do development lending when they can use their lending capacity in easier and more profitable ways.
  • There are however other lenders who specialise in development funding. That might be ‘senior debt’ (straight forward bank debt at standard ‘loan to value’ levels) or it might be ‘stretched senior debt’ (a higher level of lending against the value of the site/end value, but more costly) or it might be ‘mezzanine’ finance (a form of ‘top up’ where senior debt is preferred as the core lending but might not provide sufficient levels) – or it could be a mix of these options.
  • This market is however difficult to navigate. The long-established lenders are known in the industry and easy to find. Others might be more recent entrants to this market, are less visible and often prefer to deal through intermediaries (i.e. brokers). They do this because developers going directly to them tend to cause them a lot of additional work in filtering out of deals that don’t meet criteria and also in the presentation of cases.
  • Brokers who specialise in development know this market. They have researched and met the lenders, know their criteria and had experience of them in handling cases before. They don’t just know what the lenders say they can do, they know what they actually deliver and how good they are to work with.
  • The key to getting a development deal sanctioned now is in the presentation. All lenders have detailed information requirements and don’t have enough time to do the work for clients in the way they used to. They need to be presented with a proposition in a way that not only provides them with all the information that their underwriters need, in the right format, but which also portrays the deal in a compelling fashion. When they have about ten deals on the desk and capacity to only handle say two or three, then your deal needs to look like the one they should work on.
  • Developers find that the ‘post-sanction’ work is often overwhelming – providing additional information, working with lawyers and chasing lenders all take up valuable time. A good broker will not only source the deal for you but ‘hand-hold’ the case all the way through to drawdown and beyond.
  • Brokers can also help find the most competitive pricing and with profit margins being tighter on developments now ‘every little helps’.
  • Although brokers do require fees, the time savings, access to wider funding options and cost savings all make this a sensible area for a developer to hand-over the task to an expert.

Stirling Partners Finance have established contacts with development lenders providing finance at all levels (up to 90% of cost is achievable with the right mix if required) and have expertise in presenting cases in a way that works for lenders and we see all deals through to their conclusion.