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SPONSORED: Have you considered how to finance your latest development?

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Gordon Steele, partner and head of deals in the Aberdeen office of Anderson Anderson & Brown, discusses finance options for developers.

The construction sector has seen a sustained period of challenge following weak output in the second quarter of 2020.

In those early months of the Covid-19 pandemic, many of the funding challenges experienced by developers were largely relieved by extended exclusivity agreements and payment holidays.

Gordon Steele, partner and head of deals in the Aberdeen office of Anderson Anderson & Brown.

Since then, we have seen forward-funding and outright purchase agreements fall through as funders struggle to get comfortable with newly proposed construction timelines and the conservation of cash generally.

To address these ongoing challenges, having the correct funding structure is crucial to the successful delivery of residential or commercial property development.

From a profitability and return on investment perspective, it is vital for firms to make sure they have the right finance in place to avoid unnecessary delays and high interest charges that diminish cash flows, accepting this is one of the most complex areas of their business.

Often one of the difficult hurdles during a development is securing a financing package that is aligned with your development needs, whether it be to refinance existing facilities for working capital purposes, or securing appropriate bridge financing to purchase developments ahead of proposed forward-funding arrangements.

Top tips on overcoming this hurdle include having the right development cash flows. A crucial factor in securing the correct funding structure is understanding when you need to drawdown on a facility and how much you need access.

All too often developers agree to facilities that provide access to large drawdown amounts they simply do not require.

As a result, many businesses are hit with non-utilisation fees that unnecessarily reduce profitability.

Another top tip to bear in mind is knowing cheapest is not always best. When securing funding, the end goal should not solely be to reduce the borrowing cost – just as important in these situations, and perhaps even more so, is the underlying relationship with the lender, their track record and sector development.

We have all seen the reaction of mainstream lenders on occasions when “the ‘music stops”, so it is necessary to have a lender who really does understand the sector and its challenges.

There are numerous financing solutions available, ranging from bridge loans to mezzanine finance/equity, high net worth individuals, family offices and debt funds.

It is important to consider all of the options.

It is also important to ensure that loans provided are correctly securitised and structured in the most tax-efficient manner.

Find out more from Anderson Anderson & Brown.