It's fair to say that a high percentage of developers are currently attracted to high Loan to Cost (LTC) funding, probably because there are an abundance of opportunities out there, and having resources tied up in other projects often means more leverage is required on the next deal. 

The established lenders who operate on these tiers have undoubtedly enjoyed the luxury of being able to pick & choose the most suitable loans to write, but recently a number of new stretched senior debt lenders and “products” have emerged offering up to 90 per cent of project costs, which goes some way to increasing the competition for lenders. 

Indeed, the announcement of any new high LTC product always causes a flurry of activity amongst our developer clients but how accessible is higher Loan to Cost funding? 

Traditionally the maximum senior debt facility amount has been up to 50 per cent or 55 per cent of Gross Development Value (GDV) from the banks, with the specialist lenders sticking their neck out at up to 65 per cent of GDV, or 80 per cent of project costs. 

Most lenders will also have a cap on their day one loan to value which will dictate how much cash or equity a developer has to contribute.

There are a small number of development lenders however who will fund whatever their maximum loan to GDV ceiling allows, even if that covers the vast majority of project costs. 

We recently completed on a loan from a lender whose maximum offering at 65 per cent of GDV covered all but purchase costs and fees, leaving the developer with a relatively small sum to cover to get the project off the ground. 

Even so, developers will always still need to guarantee the facility personally, so it's not as if there is minimal or no “risk” whatsoever to the developer, but often parting with cold hard cash is much more painful than signing a guarantee might be. 

More recently, there have been a number of providers who will now go higher on Loan to Costs, for the right deal profile. 

Joint Venture (JV) funding has always been in demand, with most developers’ requirement from a JV being 100 per cent funding. 

Now clearly this is a very niche market, and given the “lender” is stumping up all the cash, the project and the developer have to be an extremely attractive proposition to qualify. 

But, with a profit share in addition to charging interest on the funds used, a very healthy return can be gained. 

It's fair to say that the higher up the scale in loan to cost, the more comfortable the lender needs to be with the experience of the developer, as well as the project itself. 

If the developer cannot demonstrate that they have delivered a comparable size and type of project successfully in the recent past, then it's unlikely that offers will be forthcoming.  And at the same time, the experienced developer must not be spreading themselves too thinly and pushing the boundaries of their own capabilities.

The return on cost which the project shows also has to be significant enough to persuade a lender to go above and beyond what they usually provide. 

Whilst most senior debt providers need to see a 25 per cent return on costs, the more aggressive lenders need to see a higher return in the appraisal, especially those lenders who will look for a profit share or a weighted exit fee. 

Of course it is understandable why most lenders need to see a certain amount of "hurt" money or risk going in from the project sponsor. 

They need to ensure the developer is kept 100 per cent focused and motivated throughout the project, bringing it to the best possible conclusion even in the event of any issues or over-runs. 

Interestingly, the latest Bridging Market Trend Report compiled by the AOBP showed a rate increase for the month of January this year, so perhaps that is indicative of more lending at a higher loan to cost, which usually comes with at a higher price. 

We continue to see flexibility from most lenders in this buoyant and competitive marketplace, and long may it continue.