September 30th, 2013.
How to plan your exit strategy
Before most lenders will consider your application to be suitable for development finance they will need to know what your exit strategy is. There are many possible exit strategies that you can consider, however it must be realistic to your needs.
This guide will walk you through all the stages of planning your way out, from choosing what’s right for your business to successfully implementing your option.
Possible exit plans
Lenders need to know that they will get their money back after the term of development finance has run its course. The main ways this can be done are: by selling the property, finding a commercial mortgage to take over or using a lump sum of cash to pay off the loan. For most developers, the only realistic options are sale or acquiring a long term mortgage – something which needs to be established before any finance is granted.
What’s best for you?
If you are developing property to sell on then your exit plan is simply the sale of that property, creating the equity needed to pay off the development finance. However, if you have created a building that you plan on using for commercial reasons then you would be better suited to finding a mortgage to take over from the development. If you took out development finance for a new location, while waiting for the sale of a previous property, then you may just be waiting to close a deal which would create the equity you need to pay off your loan.
As a developer, it is a good idea to consider multiple options, as sometimes it can be hard to sell newly built property. For this purpose you should explore refinancing options as this can act as a ‘plan B’, which will give both you and the lender extra comfort in the case of a slow sale. Due to the nature of build projects, it can be difficult to get offers for funding in advance but you can get a good understanding of whether you and your property fit the requirements needed by mortgage providers.
Preparing your exit plan
There are many things you need to contemplate when creating an exit strategy, for example: How long is the development going to take? How much time are you going to allow for any delays? What is the best exit plan for you? How easily do you anticipate the property sale?
Once you’ve answered these questions you will have a better understanding of your needs and can start to plan your exit strategy. This is now relatively straightforward; depending on the project in hand, you need to pick a way out to suit, and talk to your financial advisors in order to assess risks. After this has been worked out you can head to a commercial finance broker with your business deal and exit strategy in hand to get the best possible deals onyour development finance.
Contact us today if you need to discuss your development finance options further.