Reducing Lender Risk on Developer-Builder Projects

August 13, 2024 by admin

Whilst lenders have traditionally shied away from the developer-builder model, it is becoming increasingly difficult to get a project off the ground with a third-party builder in some sections of the market – this has forced lenders to reconsider their position. But although many lenders are now warming to the idea of funding developer-builder projects, the underlying risks that have long made them nervous remain.

The obvious downside for the lender is that they no longer have two parties sharing the risk – if the builder goes under, so too does the borrower which makes delivery the lender’s problem. There is also the big question of governance – when the developer and builder are one & the same, the financial checks and balances fall entirely to the lender.

PAYMENT TRANSPARENCY + SYSTEM CONTROLS = AUTOMATION OF FINANCIAL OVERSIGHT PROCESSES

Whilst lenders already demand additional oversight under the developer-builder model, these checks are: a) largely manual and b) rely on information that is sourced from the borrower – not ideal when one of the primary risks to the lender is the potential for the developer-builder to divert funds to other projects. Of course, satisfying the extra checks requires the developer-builder to supply extra information – the administrative burden on both parties is significant.

IPEX largely solves the financial oversight problem for lenders by placing practical limits on how the borrower can use project funds; only subcontractors, suppliers and consultants linked to the project can be paid from the account. And rather than relying solely on a ‘stat dec’, IPEX allows the lender to verify that those linked to previous claims have been paid before releasing further funds. 

In addition, as IPEX removes the need for manual oversight checks by the lender, it also removes the admin associated with ‘proving’ compliance from the borrower – the lender can already see that the right people have been paid. 

Lender protections under IPEX include: 

  • All progress payments are ring-fenced to the project 
  • Subcontractors and suppliers are subject to full KYC/AML checks and have account details independently verified before they are eligible for payment– IPEX blocks payment if entity/bank account details don’t match
  • The lender can view (and if need be, approve of) any subcontractors and suppliers that are linked to the project account before they are eligible for payment
  • The lender can confirm which subcontractors and suppliers have been paid, when & how much* making ‘cost to complete’ reports far more reliable
  • Certain ‘key trades’ may be set to ‘open book’ to satisfy lender oversight requirements whilst other contract/payment values can remain confidential (payments made under standard view are expressed as a percentage of contract value – sufficient to ensure amounts paid are in line with work performed onsite) 
  • If required, the lender can view/approve of any payment due to the developer and/or builder entities i.e. payment for preliminaries, margin, fees or other direct costs

Not only is IPEX helping lenders approve funding for those who have adopted the developer-builder model out of necessity, established operators may start to see new lenders competing for their business.

EXTENSIVE PROTECTION IF THE DEVELOPER-BUILDER ENTERS ADMINISTRATION

Should a payment default event occur, IPEX helps to minimise the impact to the lender via a range of practical controls that complement existing legal protections. 

Progress payments already made to the developer-builder via IPEX have either been distributed to approved subcontractors & suppliers or remain in the account – the funds can’t be siphoned off to other projects/accounts in the period leading up to the appointment of administrators. 

In addition, the lender receives full visibility of all previous transactions, removing much of the work associated with substantiating creditor claims and establishing their exact position on the project. 

REDUCE RISK AND AUTOMATE OVERSIGHT CHECKS – IPEX SIMPLIFIES LENDING FOR DEVELOPER-BUILDER PROJECTS

As developers increasingly look to manage both construction cost and risk by building themselves, lender comfort becomes the primary issue. IPEX removes many of the fundamental barriers to lender acceptance of the developer-builder model, helping capable developers to get feasible projects off the ground with relative ease.


* Standard developer portal view shows payment as % of contract value. Open book developer portal view shows subcontract/payment values.

CASE STUDIES