Avoid property funding pitfalls


Lenders in the market are keen to finance private practices looking to refurbish or develop their premises. Maurice Citron maps out the risks in the lending process and how best to navigate the borrowing maze.

As your practice grows, you will invariably require more space or new space.

This may mean converting newly acquired premises or extending your existing property.

Understanding lenders’ concerns and how they approach a funding proposal will help independent practitioners manage the process of borrowing money and ultimately allow them to be better placed to succeed in raising the funds for their project.

A look at a recent case based in the Home Counties will help to illustrate some of the issues that arise.

Development funding case study

A private healthcare practitioner bought a high street commercial unit and successfully secured planning permission to refurbish and extend the property, creating several hundred square feet of modern consultancy D1 space.

D1 is a category of land use under the Town and Country Planning (Use Classes) Order 1987 – as amended. It covers several non-residential institutions including clinics, health centres, crèches and day nurseries among others. The practitioner’s intention is to provide lettable serviced space to other private consultants.

Commercially, the business plan makes good sense. The area in question is affluent and there is a lack of local and accessible space to support growing private healthcare demand. As traditional retail use continues to decline on the high street, there is an opportunity for alternative uses and D1 is one of these.

However, from a lending perspective, a case like this can fall between two stools and possibly more.

Lender’s classification

The works to the premises were substantial enough to be classified by most lenders as development. However, the client is not a developer. Their experience and knowledge is healthcare.

Development Pic

An architect’s impression of the rear of completed high street development of a private practice clinic in the case study

An important prerequisite for development finance is the ability to evidence a solid track-record of previous successful projects. Notwithstanding the borrower being considered a very credible candidate, the application stalled with several lenders because the case couldn’t be classified into their lending criteria.

The healthcare team couldn’t take it on because the works constituted development and the development team turned it down because the client wasn’t a developer.

Any lending proposal has to meet the lender’s criteria to be successful and it is worth considering the process from their perspective.

Lenders continually analyse their loan book to develop lending strategy. Lending criteria puts this strategy into practice. It enables the lender to decide the levels of debt they are prepared to lend and uses defined parameters applied to the borrower, the property and the track-record of the business.

The criteria set out loan-to-value limits, debt servicing ratios and the returns required for the actual and perceived risks taken. The criteria and strategy are continually responding to the market and the wider economic context.

Difficult to classify

In our case study, lenders found it difficult to classify the proposal into their existing criteria and this can be a frequent problem with small-to-medium healthcare development projects.

Some lenders had issues with the status of the end user. The vast majority of practices are classified as owner-occupiers.

Lenders like healthcare occupiers for one very simple reason. Historical analysis over the years – and property cycles – show healthcare owner-occupiers are less likely to default on their obligations compared to other property borrowers. As a sector, healthcare carries less risk and lenders will offer higher loan to values and more competitive debt pricing as a result.

In our case study, the business plan was based on receiving rent for serviceable space, and some lenders considered this investment.

Investment lending terms can be more onerous then those offered to owner-occupiers and again a seemingly good match was derailed.

Healthcare development is usually considered as commercial development, which can be disadvantageous. Residential development, on the other hand, is the primary focus for many lenders given the well-established undersupply of housing nationally.

However, there is a strong case for lenders to take a nuanced approach to healthcare development. On the whole, developers are focused on the exit. Their commitment to the project ends when the finished product is sold.

In contrast, healthcare commitment continues past the point of practical completion because the intention is to occupy the property. The intention is critical. It will define the commercial attitude to the project from the out-set.

Solutions are out there


Fortunately, there is a plethora of property financiers in the UK who can provide a solution for most problems and, in the right hands, there are means and ways to mitigate the risks that concern lenders.

The practitioner in our case study succeeded in obtaining several offers of funding relating to different stages of the project. For example, short-term funds were offered for the construction phase up to practical completion.

These funds would then be re­financed to a different lender providing a 20-year amortising term loan. The lender was provided with additional comfort by leveraging supporting assets.

With funds in place, construction is due to start early this spring, with the opening set for the middle of summer.

Comprehensive appraisal

Having the benefit of experience will make a difference to securing development funds. A comprehensive appraisal is necessary to ensure every possible funding route has been considered and explored.

Practitioners would also do well to ensure they have full unrestricted access to the entire lending market before they commit to a lender.

Of course, all lenders will have their specific lending criteria in place, but solutions will be more forthcoming with those lenders – and particularly the people in their team – who are less process-driven.

Process lending usually works well where there is a high volume of transactions and cases can be easily pigeon-holed. However, private healthcare development is a deviation from the norm and a more borrower-focused attitude will help deliver results.

In summary, lenders are keen on the private healthcare sector because of the sector’s track record. They understand private healthcare demand is traveling in one direction given population trends and the stresses on the NHS.

There is finance out there for healthcare development. The lending process should become easier as demand in the market grows and more projects are delivered raising confidence generally.

Maurice CitronIn the meantime, the current funding pitfalls can be managed to secure finance for private practice projects.

Maurice Citron (right) is director of Citron Singer Finance, a property finance broker specialising in the healthcare sector