Real Estate Lenders: How Many Should You Have?
When it comes to getting the best finance for your business, you may need to re-evaluate your relationship with your current real estate lender.
Getting your real estate project financed means building a solid relationship with a lender. Once this is done it would seem only fair to relax a little and concentrate on your investment portfolio or developments. But, writes CODE Investing’s Head of Real Estate, Alex Lynford, when it comes to the shifting sands of property lending, it pays to lay down stronger foundations.
Instinctively it seems strange to seek out new finance if there’s nothing much wrong with your existing lender. However, complacency is dangerous. Is your relationship with the wider lending institution or just your relationship manager, who pushed your last deal past a reluctant credit committee?
Relationship managers change jobs, so do you have another advocate there? The path of property rarely runs smoothly forever, so will your relationship survive an adverse event?
Even if the lender views you with favour now, there may come a time when its lending criteria tighten, or it decides that it has placed enough eggs in your basket and declares itself “full” on your credit lines.
Even if you accept the principle of widening your lending relationships, there appear to be practical challenges. On the basis, as the Americans say, that one boy is a help, two boys are half a help and three boys are no help at all, won’t it all get too cluttered and confused? Might your existing relationship manager resent being one of many?
In fact, funders are generally adept at establishing inter-creditor agreements where necessary or factoring in loan repayments to other lenders. They accept that it’s an open market and a whiff of competition will almost certainly lead them to sharpen pencils and up their game.
Many relationship managers will have worked through the crisis years of 2008-2010 when they had to clamp down on credit to even their best real estate clients so will understand the need for diversified finance.
So, how to go about establishing new real estate lender relationships?
First, have in mind what you’re looking to get from them: cheaper pricing; higher leverage, greater expertise or perhaps a non-traditional funder to hedge your bets in case of another banking crisis? There’s been much justifiable interest in the latter.
Could a different type of funder help you realise different types of opportunity?
In finance as with comedy, what was once alternative can quickly become the mainstream: In 2017, traditional UK banks and building societies contributed only 47% of property lending compared to 60% a decade earlier, with funds and boutique lenders pushing their way in. While these tend to seek higher returns than high street banks, they usually have a different approach to risk and can deploy funds longer term.
Once you open your books to lenders they will instinctively want to take chunks out of it, so are you paving the way for a future deal or are you amenable to refinancing existing real estate projects?
Refinancing away from a functional lending relationship requires a high level of assurances. Received wisdom tells us not to change horse midstream, but then again, we don’t hear so much from those swept to their doom off unreliable mounts. If you take care to price in fees for new valuations and legals you could be in for a pleasant surprise in terms of a better bottom line, lower personal guarantees or getting a more supportive and proactive finance partner.
Intermediaries with access to a highly varied lending panel can assist. CODE’s CEO, Ayan Mitra explained, “We’re delighted when real estate clients use us to check they’re getting the best of what’s out there or to get introduced to a completely different kind of real estate lender. It makes sense: We give them a wider view of what the market’s offering, which in turn empowers them with a healthy mix of funding options.”
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