In this week's blog, we begin a series of pieces contextualising some of the reasoning behind how traditional development finance funding is assessed at a credit level. These pieces do not necessarily touch on our unique lending appetites but focus more on the generic sector-wide reasoning behind why we look for specific situations to work with and why we and others may ask for information to be presented in a certain way. In educational circles, the concept of "learning through the understanding of the why" involves going beyond simple memorisation to instil a better understanding of underlying principles and reasoning behind any given idea. This technique can be doubled down on with storytelling, and in our written pieces, we are often doing just that, simply telling a story, as storytelling is the best social delivery mechanism we have when it comes to information gathering and distribution.
The story of our client's journey is assessed as part of our application process, measured by looking more closely at their background and experience. It's one of the key metrics that the intermediary market will also consider when assessing the viability of introducing a client to a lender. Like all stories, though, its layers and nuance are key. On the surface, lending criteria around experience is typically to demonstrate practical expertise in homebuilding, successfully working with lenders and monitoring surveyors, and having demonstrable knowledge in that region to understand what works and what doesn't, these are all ticks in the correct boxes, but what's the real story here, what are the professionals, trained in analysing risk across our industry, really looking at? The same thing Woodward and Bernstein were looking at; they are simply following the money.
One of the most effective methods underwriters use is " following the money." This process involves tracing financial flows to assess the borrower's experience, economic behaviour, and the success or failure of previous development projects. It helps underwriters evaluate risk and make informed lending decisions. When assessing a borrower's past property development experience, underwriters examine the borrower's financial statements, bank transactions, and historical project records. They look for evidence that the borrower has successfully managed similar developments, particularly those of a comparable size, scope, and financial scale. This includes, and perhaps crucially, tracking the flow of funds from project inception to completion and sale or refinancing.
By doing this, underwriters can determine whether clients have used funds efficiently, stayed within budget, and achieved a profitable outcome for themselves. Credit teams will also investigate the sources and uses of funds on past projects. For example, they examine how the borrower financed the land acquisition, construction costs, permits, and professional services. They then follow how those funds were allocated, ensuring no significant misappropriations or cost overruns suggest poor financial management. They are particularly attuned to whether the project was delivered on time and whether the exit strategy, such as selling or leasing units, played out as projected.
A key part of following the money involves verifying whether the borrower or their entity had enough equity invested in previous deals. Lenders want to see "skin in the game," which signals commitment and confidence in the project. Underwriters analyse how much of the funding was borrowed versus how much came directly from the borrower. A history of successful projects with adequate equity investment typically strengthens a client's profile. In addition, underwriters and credit teams review the borrower's financial obligations and how they managed debt service in past developments. They follow payment histories on previous loans, looking for signs of delinquency, defaults, or restructuring. Positive histories where the borrower met all debt obligations and repaid loans in full and on time greatly enhance their credibility.
Another critical element is the analysis of development profits. Underwriters trace revenues generated from property sales or leases and match them against initial forecasts. This helps them determine whether the borrower has a consistent track record of delivering profitable projects.
To summarise, credit teams follow the money to create a financial narrative, a story, the flow of money from entity to entity, to decide on the outcome of the next story. By tracing where funds came from, how they were used, and what outcomes they generated, underwriters can assess whether a borrower's experience supports the viability of future projects. This comprehensive financial forensics is central to sound lending decisions in property development, and it's indeed entrenched in all aspects of lending and credit due diligence.
So why is it so essential for us to talk about this? Across our industry, the best intermediary partners have learned by "understanding the why" that when they unpack their clients' stories with them, they know the deeper components we will need to see, allowing them to continue delivering first-rate service to both their clients and lender partners alike.
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