sapphire
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Post by sapphire on Jan 11, 2018 17:29:25 GMT
I am looking at a project involving an initial "Bridging" Loan to finance the land purchase followed by four tranches of development loans each around 3 months apart to finance the new build costs, from potentially different lenders.
Each tranche is for a different amount.
All the five loans (Initial + 4 Development loans) share a proportionate and equal priority ("pari passu") first charge on the land and subsequent development and are all expected to be repaid pro rata, as and when sale proceeds from the flats are received.
Would I be right in thinking that in this scenario the lenders for the earlier tranches carry relatively a greater risk and so should be rewarded with a higher interest rate?
It is planned to pay all lenders the same rate of interest which to me doesn't appear fair, as I think the lenders of the earlier tranches are shouldering greater risks (greater period of exposure to risks of delays or issues in the project development, greater period of exposure to a potential fall in the property prices etc.)
I am keen to be enlightened if I am missing something.
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SteveT
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Post by SteveT on Jan 11, 2018 17:49:43 GMT
If the tranches are to rank pari passu, how do you imagine the later ones would get filled if they paid a LOWER rate than those already in place? Frankly the reverse is more common, incentivising lenders to fill later tranches with additional cashback, on top of the headline rate of interest. I’ve yet to encounter a loan that managed the reverse (in effect)
Ps. If you reckon that later tranches of multi-tranche development loans are the more attractive ones, even at lower rates of interest, then I’m sure Lendy would be delighted to hear from you. They have dozens to fill, and are happy to give you the same rate as the earlier lenders!
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r00lish67
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Post by r00lish67 on Jan 11, 2018 18:20:30 GMT
The other thing I'd add is that, in practice, what FS seem to do is extend funding fairly linearly against the build plan.
That sounds ok at first, but IMV, at the start of the process you know (sort of) how much the asset is worth. But when the developer is, say, 65% through the development and has received 2/3 of the funding based upon a revised valuation, then I'm rather more nervous about what happens if it all goes wrong at that point.
It's highly unlikely that another developer will just dive it to finish the remaining 35% - they'll want to re-make and "do it properly", and demand a huge discount for picking up a distressed property with unknown flaws.
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stevio
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Post by stevio on Jan 11, 2018 23:35:40 GMT
The other thing I'd add is that, in practice, what FS seem to do is extend funding fairly linearly against the build plan. That sounds ok at first, but IMV, at the start of the process you know (sort of) how much the asset is worth. But when the developer is, say, 65% through the development and has received 2/3 of the funding based upon a revised valuation, then I'm rather more nervous about what happens if it all goes wrong at that point. It's highly unlikely that another developer will just dive it to finish the remaining 35% - they'll want to re-make and "do it properly", and demand a huge discount for picking up a distressed property with unknown flaws. Valuing a development part way through is a problem in P2P How do banks do this? I wouldn't necessarily say a developer wouldn't pick up a part completed site, it is likely sold at auction for a discount which would make up for picking up where the other left off My concern would be these are often over budget and it's towards the end when developer could run out of money and good or ask for more, when the asset value doesn't support it Though strangely often feel more comfortable when investing towards end of a development as at least know most of work has been done, sales might have started and feels like less uncertainty of completion 🤔🙄🤐
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aj
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Post by aj on Jan 12, 2018 8:06:16 GMT
I am looking at a project involving an initial "Bridging" Loan to finance the land purchase followed by four tranches of development loans each around 3 months apart to finance the new build costs, from potentially different lenders. Each tranche is for a different amount. All the five loans (Initial + 4 Development loans) share a proportionate and equal priority ("pari passu") first charge on the land and subsequent development and are all expected to be repaid pro rata, as and when sale proceeds from the flats are received. Would I be right in thinking that in this scenario the lenders for the earlier tranches carry relatively a greater risk and so should be rewarded with a higher interest rate? It is planned to pay all lenders the same rate of interest which to me doesn't appear fair, as I think the lenders of the earlier tranches are shouldering greater risks (greater period of exposure to risks of delays or issues in the project development, greater period of exposure to a potential fall in the property prices etc.) I am keen to be enlightened if I am missing something. As long as planning is already in place, I don't agree that the first loan has a greater risk than the others. It is exposed to risk for longer, but it will be earning interest for longer too. If anything, the last loan has the worst risk to reward ratio as the majority of issues I have seen with development projects occur where the money has all been spent and the project is not complete. The tranche system is used as the borrower does not have the pay interest on the full amount over the course of the entire development. It should* also protect lenders as the developer will be expected to meet certain milestones for each tranche to be issued. *cough... whitehaven... cough....
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sapphire
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Post by sapphire on Jan 12, 2018 8:52:59 GMT
Thanks to all for your views.
To clarify:
-The project has had planning permission before the initial bridging loan was provided.
-Interest is only paid to be at the end along with the principal.
Currently the project is looking to fund Tranche 2 .....since Tranche 1 was lent there has been a 2 month delay in progress per the initial timescales, so the contingency has been more than eaten up ...the developer claims he can speed things ...but only time will tell if this will be the case or indeed if there are greater delays!
A potential Tranche 2 lender is unsure if the project will complete on time and so I think they shoulder a greater risk... a potential tranche 3 or 4 lender will have greater clarity of the progress at that time and also potentially less outstanding time until project completion.
Yes an earlier Tranche lender may get a interest for a longer period, in case of a delay, but the gross LTV percentage (including interest) is increasing having regard to the delay, so I think the overall risk is increasing ....a later tranche lender has access to more project completion info and so can make a more considered decision.
A potential later tranche lender also has the option not to invest and so not be exposed the risks (based on potentially a greater degree of project completion info at that time) but the the earlier Tranche lender is committed till the end and so I think carries a greater risk.
This appears to be one of those questions one can debate on a lot!
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r00lish67
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Post by r00lish67 on Jan 12, 2018 9:12:27 GMT
Thanks to all for your views. To clarify: -The project has had planning permission before the initial bridging loan was provided. -Interest is only paid to be at the end along with the principal. Currently the project is looking to fund Tranche 2 .....since Tranche 1 was lent there has been a 2 month delay in progress per the initial timescales, so the contingency has been more than eaten up ...the developer claims he can speed things ...but only time will tell if this will be the case or indeed if there are greater delays! A potential Tranche 2 lender is unsure if the project will complete on time and so I think they shoulder a greater risk... a potential tranche 3 or 4 lender will have greater clarity of the progress at that time and also less potentially time until completion. Yes an earlier Tranche lender may get a interest for a longer period, in case of a delay, but the gross LTV percentage (including interest) is increasing having regard to the delay, so I think the overall risk is increasing ....a later tranche lender has access to more project completion info and so can make a more considered decision. A potential later tranche lender also has the option not to invest and so not be exposed the risks (based on potentially a greater degree of project completion info at that time) but the the earlier Tranche lender is committed till the end and so I think carries a greater risk. This appears to be one of those questions one can debate on a lot! You have me intrigued now, is this a current live P2P opportunity? It sounds like an FS style loan, except you seem to preclude being able to exit early if you're an earlier tranche lender, which you (mostly) can via the FS SM if they're sufficiently distanced in time (>30 days apart). I think for an investor who has the time and inclination to track progress, it's kind of essential as you're otherwise totally at the mercy of the platform's perception of progress at each tranche launch <infectious cough> * whitehaven*. In fact, I can't think of a platform off the top of my head that offers multi-tranche loans with no secondary market - I'm sure someone knows one!
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seeingred
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Post by seeingred on Jan 12, 2018 9:21:14 GMT
All of which depends on whether the valuation holds up 18 months down the line when properties come up for sale: www.mirror.co.uk/money/house-prices-brink-collapse--11817063Hindsight is always a wonderful thing - it can make you rich as well as preventing you from becoming poor.  Just to clarify - no I do not read the Mirror - just popped up on the internet. |
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SteveT
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Post by SteveT on Jan 12, 2018 9:55:17 GMT
Thanks to all for your views. To clarify: -The project has had planning permission before the initial bridging loan was provided. -Interest is only paid to be at the end along with the principal. Currently the project is looking to fund Tranche 2 .....since Tranche 1 was lent there has been a 2 month delay in progress per the initial timescales, so the contingency has been more than eaten up ...the developer claims he can speed things ...but only time will tell if this will be the case or indeed if there are greater delays! A potential Tranche 2 lender is unsure if the project will complete on time and so I think they shoulder a greater risk... a potential tranche 3 or 4 lender will have greater clarity of the progress at that time and also potentially less outstanding time until project completion. Yes an earlier Tranche lender may get a interest for a longer period, in case of a delay, but the gross LTV percentage (including interest) is increasing having regard to the delay, so I think the overall risk is increasing ....a later tranche lender has access to more project completion info and so can make a more considered decision. A potential later tranche lender also has the option not to invest and so not be exposed the risks (based on potentially a greater degree of project completion info at that time) but the the earlier Tranche lender is committed till the end and so I think carries a greater risk. This appears to be one of those questions one can debate on a lot! The question is easily resolved, provided that you have a time machine and/or a working crystal ball. If it were known for certain, before commencement, that a development would proceed on time and within budget then it might well be possible to negotiate a finance structure where the later loan tranches received a lower return. However, the only way I can see this being achieved in the real world would be via some sort of insurance policy that guaranteed to cover the costs of any delays or over-runs and so de-risked the project, and the cost of such a policy would likely be prohibitive. In practice, the interest rate for the entire development facility is usually negotiated upfront, before commencement, taking account of perceived risks of delays / over-runs at that time. Where the funding comes from a single lender (eg. a bank), they are typically obliged contractually to advance the later tranches at agreed milestones. However, where the funding comes from a P2P platform, the platform relies on their being sufficient lender support to fill the later tranches, at a stage when progress versus the project plan will be known. Hence their regular need to reach for the cashback lever if there is any sign of project slippage, or simply if lender take-up is insufficient.
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