IMPORTANCE OF EXIT STRATEGY | TWELVE GRAINS CAPITAL

Hi! David here. My biggest learning from working in private lending, is just how important an exit strategy is for private lenders.

So what exactly is an exit strategy? An exit strategy refers to how the loan a client is seeking, will be repaid. For a private lender, how the loan will be repaid, or “how do we get our money back” is huge in the decision making process, with much analysis going into what the strategy is, the likelihood of it working, and various degrees of evaluation of the risks associated with that strategy.

Some common exit strategies can include planned sale of a security property, or Completion of a property development and then sale of some or all of the completed project. This is a common strategy and probably why private lending is such a good fit for property developers who are often prepared to pay more for the finance in return for low or no presales.

OR Refinance to another lender. This one sounds simple, but it probably comes under the most scrutiny. No private lender takes any comfort from being refinance by another private lender, particularly not in 6 or 12 months time. Refinance strategies need to be assessed on what is changing with the borrower to make a lender who is not able to finance the deal today be able to finance at a future date.

If you have a project you’d like to discuss, get in touch today and see how we could help!

Here are some examples of exit strategies that work:

• Land bank loan — client is halfway through another development with there bank. The project is presold and expected to complete in 9 months time. The equity and profits from this deal will be invested into the next project (land bank loan) and at that time an application will be made with their bank to fund the project on the same terms.
• Equity release loan — client paid out a partner quickly via gearing up against a unencumbered vacant commercial property. 12 month loan term provide to allow the client time to find a tenant at which point the property could be financed by a bank with an acceptable LVR and interest cover ratio from that new lease.
• Development loan — client is building 10 townhouses and wants to hold onto them. Client has a business and support from a Bank but they can’t do construction lending but can do investment lending, so the construction loan with Keystone was structured to fit into those investment lending metrics so a refinance was possible at the end of the construction period.

Here are some examples that don’t work:

• Client needs the highest possible LVR on a development site purchase. Where will the equity come from for the development? When the client gets the DA the property will go up in value and then they will refinance!
• Client has a business that has had a rough year. The client wants to refinance their Bank debt with a private loan. Things will get better next year and they will refinance back to the Bank!
• Client needs to refinance existing private loan. Would like some cash out. Can refinance in 12 months time!

So when we talk about helping you in the future, just remember the conversation always needs to cover the exit strategy in detail!

Let us know how we could help. Speak with us today.
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