Not too long ago, as the private lending market began to hit its straps in Australia, I recall reading several articles that compared the traditional commercial lending approach of the main banks (the Big 4) with the emergence of non-bank lenders.
That conversation and debate has certainly taken a life of its own and indeed been educational, thought-provoking and at times amusing.
However, most of the discussion has centred around the macro-economic impacts and regulatory issues and has generally been from the investor risk-return perspective rather than exploring the practical implications and considerations for the borrower.
As the private credit sector becomes more and more widely accepted in Australia for real-estate backed lending – what has not been as well covered and is generally less understood from borrowers, is the vast differences amongst the raft of alternative finance providers themselves.
In years gone by a mid-market property developer could maintain a relationship with their commercial bank and enjoy relatively consistent terms and pricing outside of major shock periods such as the Asian or global finance crisis or COVID-19. Then on occasion if needed, it was possible to assess the competition or explore non-bank alternatives if the leverage was pushing outside customary boundaries.
However, today the field of comparison and options have shifted from a handful to potentially hundreds or more distinct financing providers for any given project.
Consider the range of big picture factors (in no particular order) that can influence a private lender’s appetite when a deal is first canvassed and needs to be filtered:
LOCATION
CBD or city fringe – “YES”
- “we are definitely very active on the eastern sea-board…”
- “we are happy to look at Adelaide or Perth but it would depend on the specifics of the deal…”
Suburban – “POSSIBLY”
- “but it would really depend on the strength of sponsor and the asset type…”
Regional – “NO”
- “probably not unless it was Geelong or Newcastle”
ASSET CLASS
- Multi-residential
- Office
- Industrial
- Retail
- Land sub-division
- Alternative (hotel, student accommodation, child care, self storage, health care, data centres, co-living)
LOAN SIZE
- >$10m
- $5m to $50m
- $10m – $30m
- >$50m
WHERE IN THE CAPITAL STACK IS THE FINANCE NEEDED ?
- Senior
- Stretch senior
- Prefferred equity
- Mezz
- Equity
Not to mention these factors are all constantly changing day by day, as market conditions and investors’ expectations shift.
So a likely funding partnership can quickly be de-railed for factors outside the borrower’s control or be met with feedback along the lines of “we have a new fund being set-up at the moment so I will have to get back to you”!
Then think about the myriad of transaction specific characteristics that a private lender quite reasonably needs to understand as part of their risk assessment for a property development:
- Is the sponsor experienced in this space?
- Is a permit in place?
- What does their balance sheet look-like?
- Where is the equity coming from?
- What is the borrowing structure?
- Who is the architect?
- Who is the project manager?
- Do they have a consultant helping them?
- Does the valuation stack up? A topic in itself for another blog.
- Has a Q/S confirmed the costings?
- Who is the builder?
- We will need our lawyers to review all the contracts.
Bizarrely, a project can also be stifled because the private lender is simply too busy with other transactions to properly dedicate their time and resources.
And finally, detailed commercial loan terms need to be properly benchmarked and scrutinized once a term sheet is received:
- Loan amount and available funds
- Interest rate
- Penalty rates
- Facility line fees
- Establishment fees
- Administration and compliance fees
- Security structure
- Loan term
- Minimum earn to the lender
- Certainty of funding
- Level of pre-sales or “take-out” arrangements
- LVR, LCR
- Other conditions precedent and subsequent
- Reps and warranties
- Default and review events
With the troubling combination of subdued asset valuations and persistently high input costs making feasibilities more and more challenging, a funding package can genuinely “make or break” a new development project.
Not only from a financial perspective, but to ensure a seamless process and eliminate unnecessary headaches and delays that distract from meeting other project milestones.
It is therefore critical when engaging with private credit funds that borrowers:
Fully understand the inherent nuances and risks within the private lending market:
- Who are the main players that may suit the location, asset class and loan amount?
- What are the common structures, typical terms and market pricing regimes?
- What is the extent of relationship partnering to establish a fruitful track record?
- What are the pitfalls to watch for within documentation?
Have undoubted transparency around the availability and source of funding:
- There is nothing worse than finding out a lender does not have the liquidity to meet progress draw-downs during a construction program or,
- Discovering the lender has not been compliant in terms of originating the funds’ capital.
Gatehouse Hospitality’s capital division provides debt advisory and capital arranging services.
- The firm is sector agnostic and works with successful property developers and investors to secure optimal financing terms for new projects and re-financing of existing portfolio assets.
- Gatehouse takes an analytical and data driven approach to cut through complexity and do the heavy lifting on clients’ behalf to source and compare viable financing alternatives.
- The company maintains broad relationships covering the spectrum of institutional financiers all the way through to smaller, bespoke private funds.
Connect with Anthony Ries, CFO and COO at Gatehouse Hospitality to discuss your experiences with borrowing from private credit funds or more general thoughts on this topic.