DON'T JUST 'EXTEND TO PRETEND' - COLIN SANDERS - BRIDGING & COMMERCIAL
08.01.24
DON'T JUST 'EXTEND TO PRETEND' - A RESPONSIBLE AND TRANSPARENT APPROACH IS VITAL FOR BRIDGING LOAN EXTENSIONS IN A TOUGH MARKET.
By Colin Sanders, Chief Executive Officer, Tuscan Capital Limited.
The difficult situation faced by some bridging loan borrowers at the moment is that their exit plan isn't quite working out.
This may be because they had hoped to sell the property on, after carrying out a range of refurbishments, but this has not happened as quickly - or at the hoped-for-price - as a result of the general slowdown in the housing market.
In other cases, it may be the improvement works that are taking longer than expected - anyone involved in the development sector will know shortages of both labour and materials have been a real challenge over the last couple of years, meaning projects not only take longer but cost more to boot.
These hurdles mean the timescales planned by investors are pushed back, which can result in investors looking for an extension on their bridging loan. At Tuscan, we have seen a significant increase in extension requests from borrowers who need more time in order to complete their projects.
It's also become an ever more common conversation with our broker partners, who want to get a clear picture on what our position is when loan extensions are requested.
What's become obvious from these conversations is that a host of experienced bridging loan borrowers, who in the past have needed extensions from other lenders, have found the process a painful and expensive ordeal.
Treating customers fairly
I believe that in order to treat borrowers fairly when it comes to extensions, there cannot be a one-size-fits-all approach, instead, you need to judge each case on its individual merits.
Really, that means looking at each new request as we would a new application, and asking the crucial questions that are fundamental to any bridging loan case, such as how viable the exit plan is, why hasn't the exit plan for the original loan worked out within that initial timeframe, if there is to be an extension, does it worsen the borrower's position, and if so, does it increase the risk of lending?
Ultimately, if the exit strategy is clear and credible, and we are comfortable that taking on this extension won't leave the borrower in a worse position, then more often than not we will be able to agree to an extension over an appropriate new term.
The question of fairness is not just agreeing to the extension, but also the financing involved.
'Extend to pretend'
What is important is that borrowers are not allowed to 'extend to pretend'.
Essentially this is where a borrower wants to extend the term of a bridging loan where the original exit plan has failed, and there isn't a realistic exit plan in place.
Equally, we won't extend where it will leave the borrower in a worse off position as far as their equity is concerned.
Focusing on operating in this manner can lead to awkward and uncomfortable conversations with borrowers and brokers alike.
It goes without saying that advisers are problem solvers, and want to help secure the financing clients are looking for in the event their initial plan has not worked out.
However, that's where communication is so crucial, clearly explaining our decision and our view of the position. This can help our focus, or even change, the view of borrowers around what they do next.
Ultimately the last thing any reputable bridging lender wants to have to do is have to appoint Law of Property Act (LPA) receivers in order to force the sale of a borrower's asset.
Yet it can be the case that only the realisation that this could happen pushes the borrower into recognising their position, and the consequences of a bridge overrunning without a viable plan B in place.
Breathing space from the outset
Getting the sums to add up is perhaps the most fundamental aspect of any property project, which is why I have always felt it's good advice to take a more cautious approach.
For the borrower, this may mean a financial buffer, or additional breathing space in terms of the timeline, when applying for the initial funding.
There is little material downside to arranging a longer term than the borrower believes they actually need, since if the loan is repaid early then all interest and fees are rebated. Similarly, most bridging lenders do not employ exit fees or early repayment charges, so being a little more cautious at the outset can ensure the borrower avoids the hassle and costs of an extension.
However, it's equally important for brokers to be confident that, in the event an extension is required, the lender will handle the case in a fair and transparent way.
Read the full article on Bridging & Commercial.
For more information or to get in touch with the team, please contact us:
Call Us: 020 7846 9030
Email info@tuscancapital.co.uk
View our Regional Offices:
London Office
Birmingham Office
Manchester Office
A range of case studies demonstrating examples of previously completed loans can be found here.