CapitalRise’s tailored investment selection process
We’re passionate about providing an excellent service to investors and selecting only the best investment opportunities is just the start of it.
We assess lots of opportunities, but not many of them make the cut and this post seeks to provide an overview of this process.
Initially a project has to make it through our appraisal review, where we’ll take a first look at the people involved and the property in question. The project will then be subject to the scrutiny of our highly experienced Credit Committee before it can progress any further. If it meets with initial approval, then that is when the due diligence process begins.
The four key areas we focus on are: the borrower; the property; the business plan; and the financials. There are multiple reasons why we might choose not to progress with a loan – however, often the project is in an area we don’t invest in, the borrower doesn’t have a strong track record, or the borrower’s estimated financials don’t match with proven market expectations.
As important as the numbers, if not more so, are the face-to-face meetings we have with the borrower to assess their character and experience. We usually meet the borrower on multiple occasions as part of the credit approval process, and at least one of those meetings will be with one of our Founders or a Credit Committee member.
The property in question is also visited by a member of the Credit Committee and the Lending Team. This is critical to establishing a comprehensive understanding of the project and getting a feel for the surrounding area and assessing the scheme’s suitability for its intended end buyer/s.
We only lend to developers with a strong track record of successful developments, so we’ll also visit their previously completed developments to evaluate the quality of their finished product. This is backed by a detailed financial analysis of a previous project, to check that it successfully delivered against its business plan. We will also look to take independent professional references in respect of the developer, in support of their credentials.
The property & the market
Once the developer passes the first stage, we then delve into the detail of the project and the property itself. This entails an analysis of the property’s location and surrounding area. Detailed reviews of market demand for the project being proposed are undertaken including analysis of comparative property data and historical sales/lettings in the area. The team will review all planning risks where applicable.
Property market conditions can affect the viability of a proposed project, so an assessment of the liquidity and performance of the housing market in the area and specifically for that type of dwelling is key. We’ll also review commentary and market forecasts from local Estate Agents and property professionals to get an in-depth view of what local market experts think.
The business plan
When assessing a development project, our analysis will include:
- The build method
- Time scales
- Planning requirements
- Capabilities of the main contractor and professional construction team
- Estimated costs
CapitalRise will always instruct a Chartered Surveyor to undertake an independent professional valuation of the property or site, in accordance with the Royal Institution of Chartered Surveyors (RICS) ‘Red Book’ guidelines for lending purposes. If we decide to proceed with the loan, the property values we will use to calculate our loan to value ratios will then be taken from such a report.
We use a panel of valuers which includes Savills, Knight Frank and JLL who have deep expertise in the area of real estate market that we focus on.
For development schemes CapitalRise will also instruct an Independent Monitoring / Quantity Surveyor, to perform a critical assessment of the development project on our behalf. Their independent, expert report will assess in fine detail the developer’s proposed project plan, timelines and detailed budgets to provide comfort that the proposed project is realistic, and that sufficient costs and contingencies have been built in. Our Independent Monitoring Surveyor will work with us throughout the duration of the scheme to ensure that our interest is protected at all times.
Our last step is to assess the numbers and determine whether we think the project is financially viable, not only from a lender’s standpoint, but also sufficiently profitable from the developer’s stance, such that they remain committed to the success of the scheme. Our tailored evaluation model has been built specifically to calculate a number of key financial ratios for our experts to consider, which may flag certain warning signals about the financial viability of a scheme at an early stage. At a high level, these include:
- Day one loan to value ratio (LTV)
- Loan to gross development value ratio (LTGDV)
- Gross development value in pounds per square foot
- Breakeven pounds per square foot (net and gross)
- Loan to cost (LTC)
- Profit on Cost (net and gross)
We analyse the financial appraisal and cashflows which have been provided by a developer in great detail and check all the assumptions they’ve made, including sales price, build costs, professional fees, and other miscellaneous costs, to make sure that sufficient contingencies have been allowed.
We review the capital structure of the project to ensure that the project is fully funded and that the funding is appropriate (both the equity and debt) for the business plan. We always make sure that the developer’s equity is eroded first if things don’t go according to plan, in turn this aims to ensure that our investors are protected as much as possible on all transactions.
And finally – the legal documents
Once we’re happy that we’ve satisfied all our criteria, we’re ready to instruct a solicitor to perform a full legal review of the proposed scheme, to ensure that as a lender we have adequate legal protection on any development scheme we’re looking to fund. Our legal documentation is always based on Loan Market Association (LMA) standards and we will engage a law firm from a selected panel including Stephenson Harwood & George Green.
The suite of legal documents prepared will cover the security package agreed with the borrower for the loan, which will typically include:
- A first or second legal charge over the Property
- A debenture (including floating charge) over all assets of Borrower
- Parent company or personal guarantees from underlying borrowers
- Assignments and collateral warranties in respect of the main build contract and professional team.
Ready to fund!
Once all legal documentation and agreements are in place and compliance requirements have been satisfied, we’re ready to fund and create an exciting investment opportunity for our members!
The time it takes to complete our due diligence process varies widely from project to project, as we’re happy to take the time we need to assess an opportunity rigorously. What’s more, the work doesn’t stop there.
Once a project is funded, we’ll monitor it constantly and make sure we can provide investors with detailed quarterly reports as the project progresses toward completion.
Investing involves lots of different types of risks, so we believe that our investors should only invest in opportunities that they understand fully. By making sure we are thorough throughout the selection process and sharing all of our findings with CapitalRise members at every step of the way, we hope they feel empowered to make fully informed investment decisions.
The information provided in this blog post is for general informative purposes only and is not intended to provide specific advice or recommendations for any individual or any specific investment opportunity.