1. Quality of the Security Asset
This point addresses the intrinsic value and liquidity of the asset securing the investment. Investors need assurance that the asset is easily convertible to cash if the worst-case scenario occurs.
| Factor | Description | Review Status |
|---|---|---|
| Type of Security | Is the security a First Charge (Standard Security in Scotland) over land/property or a secondary charge? First Charge provides the highest level of protection. Check with your investor whether you can have the first charge. | |
| Market Liquidity | How quickly can the asset be sold? Residential developments in high-demand areas are generally preferred. Check whether the property is in an area with good transport links, schools and investment. | |
| Asset Condition | If the security is an existing asset, is it fully developed, partially built, or raw land? You ideally want to be investing in pre-built properties that can be quickly refurbished for safety. | |
| Valuation Comparables | Can the investor validate their end value of the property? Do they have comparable sales from the last 12 months within a quarter mile of the property? |
2. Loan-to-Value (LTV) and Loan-to-Cost (LTC) Ratios
The LTV and LTC ratios are critical risk indicators. A lower ratio means a larger equity cushion held by the borrower and greater protection for the investor.
| Metric | Target Standard | Current Status |
|---|---|---|
| Maximum Gross LTV (Loan Amount / End Value ) × 100 | You must make sure that your investment does not exceed 65% of the End Value of the property. This ensures that after the refurb there is enough money to pay you back with the interest. | |
| Maximum Loan-to-Cost (Loan Amount / Total Project Cost) × 100 | Must not exceed 75–80% of the total project costs. This ratio ensures that the investor has their own ‘skin in the game’ and that if the project runs over budget they are able to take the hit before your return is put at risk. | |
| Stressed LTV ((Loan Amount / (End Value × 0.9)) × 100) | This ensures that if there is a 10% drop in the market, your initial loan does not surpass 70% of the end value. This allows you to feel comfortable even in the worst-case scenario. |
3. The Borrower and Their Track Record
The quality of the borrower is an essential layer of security. Experienced borrowers reduce the risk of project mismanagement and default.
- Experience: Has the borrower successfully completed similar projects in the last five years and evidenced it?
- Net Worth: Does the borrower have sufficient net worth outside the project? This provides additional recourse.
- Personnel: Who is the key contact for the project and do you have contact information for them?
4. Legal Due Diligence and Perfection of Security
This factor ensures the legal process is robust, making the security legally enforceable. A clean and perfected security is the cornerstone of investor protection.
| Deliverable | Requirement | Status |
|---|---|---|
| Title Search | Does the property have a clean title and do you have access to a legal opinion that confirms that there is no prior charge or restrictive covenants impacting your development? | |
| Legal Documentation | Do you have a copy of the loan agreement that you have entered into with the investor? | |
| Priority Check | Have you been provided with evidence that your charge has been registered with the correct legal authority? |
5. Exit Strategy and Contingency Planning
Investors need a clear path for the loan repayment and a Plan B should the primary exit strategy fail.
- Primary Exit: The investor should provide you with a clear schedule for the primary exit strategy and maintain communication throughout the process.
- Contingency Exit (The ‘Work-Out’): There should be a clear Plan B should the primary exit strategy fail, with timelines laid out alongside the primary plan.
- Contingency Funding: Does the company have proof of funds to ensure that if both plans fail, there is enough capital to reimburse your investment?