Senior & Stretched Senior Debt
Senior Debt & Stretched Senior is the name given to Development Finance where the lender has a 1st legal charge over the asset.
Residential, Student, Commercial
- Senior Debt describes ‘standard leveraged’ industry Development Finance products where gearing is available typically up to 80% of total project costs (LTC) with a maximum cap of 60% of Gross Development Value (GDV).
- Stretched Senior Debt describes ‘highly leveraged’ Development Finance products where gearing is typically up to 90% of total project costs (LTC) with a maximum cap of 75% of Gross Development Value (GDV).
In truth the defining line is blurred between products; if 80% LTC/60% GDV is Senior Debt and 90% LTC/75% GDV is Stretched Senior Debt, what is 85% LTC/65% GDV? What really matters is not the name of the product but the leverage to price ratio. The received wisdom is that the higher the leverage (and hence the higher the risk to the lender), the higher the pricing and that is certainty true for prime lenders/borrowers.
Leverage above 90% LTC is generally only available on an Equity/JV basis (see Equity, JVs & 100% Funding)
Lenders will earn a return on their funds by applying a variety of charging structures to include:
- Interest: normally charged on the drawn balance (occasionally on the total offered facility), calculated daily and compounded monthly or it may be a flat rate which is not compounded.
- Non-utilisation fee: charged monthly on the undrawn element of the building loan (not a common feature).
- Lending fee in: calculated as a percentage of the offered facility or a fixed sum, either payable in whole, or part thereof, on acceptance of the offered facility or drawdown of the first tranche of funds.
- Lending fee out: charged on the repayment of the facility calculated as either a percentage of the facility, or a percentage of the GDV of the project.
- Senior Debt interest rates on prime Residential projects (experienced developers with a good financial covenant and a well located and viable project) typically range from 4.5-7% PA, plus completion and exit fees. Where the project is deemed to carry greater risk to a lender (experience/financial covenant/project viability), pricing will be higher.
- Stretched Senior Debt interest rates on prime Residential projects (experienced developers with a good financial covenant and a well located and viable project) typically range from 8.5 -11% PA, plus completion and exit fees. Where the project is deemed to carry greater risk to a lender (experience/financial covenant/project viability), pricing will be higher.
- Student and Commercial projects will be priced on relevant market risk factors.
New Build, Conversion and Heavy Refurbishment projects.
England, Wales, Scotland, Northern Ireland (limited availability), Republic of Ireland (limited availability in an emerging market for some UK based lenders)
Full Planning Consent must be in place or consent under Permitted Development Rights (PDR). If the asset is to be acquired with Outline Planning Consent, a Bridging Loan will be required to purchase the
asset pending the granting of Full Consent (in exceptional cases where reserved matters are minimal it may be possible to secure Development Funding at the Outline stage); and where possible a lender should be sought that offers both Bridging and Development Funding to avoid having to re finance.
- Sole traders, partnerships, LLP’s, Ltd Co’s and offshore vehicles.
- When the vehicle is to be a Ltd Co, lenders will often prefer it to be a Special Purpose Vehicle, or SPV, set up for the specific project and owning only the project asset.
- Where the borrower is to be an offshore vehicle full disclosure and audit of the directors and beneficial owners is required.
- 1st Legal Charge.
- Debenture (incorporated borrowers).
- Personal or Corporate Guarantees (incorporated borrowers – as a norm; lowly leveraged projects where the borrower has a strong financial covenant may be an exception). The amount any type of Guarantees vary from full debt to a percentage of build costs and interest, depending upon the lender’s policy.
- Collateral Warranties from the design team.
- Assignment of JCT build contract (where a third party contractor is appointed).
At Optima we broker Senior Debt funding from £1M to £50M.