Exit strategies: a guarantee for Developers

October 8, 2020

Exit strategies for Developers

"As we continue to be innovative and entrepreneurial for our Developers, I would like to share with you a product we have recently researched offering a guaranteed exit strategy. In the past few months, lenders have become increasingly concerned about pre-sales and exist strategies and have asked for 30% or more before the finance is granted. This product allows a Developer to proceed much faster with the finance and then subsequently starting the project.

The opportunity is for developing schemes or phases of 15-60 units with a typical GDV of £3m to £20m.

The guarantee removes pricing and demand risk, opening up access to finance on improved terms and with increased leverage. As part of the guarantee, the provider will pay over a 10% cash deposit which can be released to the developer pre-construction. These funds can have a transformative effect on viability, reducing equity requirements and boosting developer returns.

The guarantee removes all speculative risk completely changing the credit profile.

So how does it work?

1. An interested party will generate an instant underwrite through the product providers online engine. This proposal will detail the sales guarantee as well as demonstrating expected improvements in returns and reductions in equity input.

2. A surveyor will engage with the developer, their lenders and advisors to review the full details and instruct lawyers

3. The provider will exchange contracts, pre-construction, guaranteeing to acquire all units on a site at a set price. They will pay over 10% of the contract price as a deposit which can be released to the developer or their lenders for their use.

4. The developer will commence construction and open market sales. For each unit sold on the open market the provider will take a small underwrite fee for providing the sales guarantee.

5. If there are unsold units at the end of the development cycle, or at any point in the process, the developer or lender can call upon the provider to complete on the remaining sales.

A working example:

A typical benefit enjoyed on say a £10m GDV scheme using the sales guarantee versus speculative approach:

• 78% reduction in upfront developer cash contribution

• 186% increase in developer returns on cash invested

• 10% deposit released to the developer on exchange

• 91% Loan To Cost

• Improved viability allows for stronger offers on new sites without losing margin

• Guaranteed sales, pricing and exit

• Develop more stock and more sites

• Quicker, cheaper and easier financing with a sales guarantee

• Reduce/remove personal liabilities

• The 10% deposit plugs a developers equity shortfall