The current market for development financing has highlighted the need for developers to again establish solid working relationships with funders. Banks have pulled back and GFC greatly reduced the number of well-established and reliable lenders. Operators like GPS are not in a book build mode. We are now being more selective.
I have seen a large increase in the number of applications for funding across my desk. This has led me to introduce a priority program. Number one on the list is repeat borrowers. Both credit and investors like proven performers.
This has led me to think ahead and establish a “next generation” program for developers at GPS. It is something I have done with quite a degree of success in other facets of the GPS business.
The next generation program is designed to bring new borrowers into the GPS family. At first instance, for smaller projects (sub $1.5million) the funding may come through a non-core GPS funding line to achieve a cheaper and competitive financing solution.
The difficulty experienced by many borrowers is that when they start looking at larger projects, the number of funders decrease dramatically. If a borrower funds their first few smaller projects with funders who cannot go the distance and offer larger loans, then they either need to stick to smaller projects or go back to the drawing board and establish new funding relationships. They then are again an unknown quantity and cannot command loan pipeline priority.
In the current non-bank lending market, most operators cap out at around $3 million. By $6 million, it is a dead zone with only a select few lenders still in the market. The funders who can offer loans in excess of $6 million generally work together and co-fund at this level.
In addition to the five mortgage funds operated by GPS, we also have funding arrangements with a growing number of southern based operators, who respect our local knowledge and diligence. This has taken GPS to having access to ten funding lines at last count.
The next generation program at GPS is not designed only for those who are new to developing. Many GPS borrowers also borrower from the bank. They use the flexibility of GPS lending to run additional projects and appreciate the benefits of having a strong relationship with GPS.
We are currently in a lenders market and this does not look like changing in the foreseeable future. Relationships with funders are now very much back in vogue.