In thinking about its residential flexible development exit loan product (aka "Castro Loans"), London based bridging lender Vitvo has been mindful to follow its guiding principle of challenging orthodox thinking with a view to providing meaningful, value added solutions to the busy property developing professional.
Ian Wilson, CEO of Vitvo says: “As everyone knows, as a development completes the developer’s aim is not just to pay off their current development loan; it’s usually to release as much equity as they can to help on the next scheme. And with any kind of delay on a scheme, invariably the developer is also under pressure to re-pay their development loan before penalties kick in. So the pressure is on. We empathize with the developer and we understand their business needs and priorities; we see our job at Vitvo as helping them make that transition as easy and, just as importantly, as fast as possible. ”
Applying Common Sense
With this in mind, Vitvo believes in taking a common sense approach to end of development situations that recognizes the practical realities that usually exist at that time.
Ken Purchase, Head of Underwriting, explains: “Too often we find other lenders adopting a tick box mentality towards these ‘development exit’ or
‘sales period’ types of loan in order to approve them. This mentality focuses not only on ensuring that the main development risks no longer exist but also that each and every minor risk in relation to the site has been discharged and every bit of paper has been completed ahead of drawdown. As every developer knows, the end of a development simply doesn’t look like this. Typically, some things are ahead of time; some things are behind.
“At Vitvo we do not believe in getting waylaid by the minor issues. So, for example, not having fully completed the snagging list, or not having had the last inspection from the structural insurer, or not having formal written discharge of planning conditions are not deal breakers for us. We know that seasoned developers who surround themselves with skilled professionals know only too well what is required of them to be able to start selling units. Our inclination is to document completing these sorts of details as conditions subsequent on a loan, not precedent.”
Equity Release During The Loan Term
Post drawdown, Vitvo also permit further equity release to the developer as units are sold off a development. Prior to loan completion, Vitvo
will agree with the developer a minimum percentage of the proceeds of unit sales to be earmarked to pay down the prospective loan. Although dependent on the LTV of the loan, Vitvo will typically allow the developer to retain 25-30% of any sale proceeds – more on low LTV deals – so allowing the developer better cash flow for its business.
“The key issue for us is that we do not want a situation where the LTV of our loan increases during the life of the loan,” says Ken. “Subject to
that overriding constraint we are happy to agree sale proceeds splits that enable the developer to extract equity from each and every sale.”
Step Down Interest Rates
Ken adds: “If extracting cash from each property sale is not such a priority for the developer, then another attractive feature we offer is the prospect of a lower interest rate being charged as the loan’s LTV goes down following unit sales. Basically, a lower LTV is a lower risk and this should be reflected in the interest rate charged. So, if a developer is happy to agree to a sales proceeds split that results in a material drop in the LTV as units sell then we are open to lowering the interest rate on the loan that remains.”
The key features of Vitvo’s Flexible Development Exit Loan are:
- Up to £1.25m for single property security, £2m for multi-unit security;
- Up to 70% LTV;
- Maximum 12 months;
- 1.25% Arrangement Fee;
- No exit fees;
- No personal guarantees required for sole trader;
- Previous credit impairment considered.