Development Funding: Know Your “Step-in” Rights

When you are looking for external sources of financing for the construction of your development project –it isn’t only about choosing the right source of finance but more importantly agreeing on the right form of security to ensure that if your project fails your personal assets will not be compromised.

Although many, if not most lenders today require borrowers to personally guarantee a loan or secure it with personal assets– personal guarantee should only be considered as a last resort. After all, if things go belly up, you stand to lose major personal assets.

From lenders point of view, the best way to protect their investment is through securing it against other valuable assets, thus they would ask you to provide them with a personal guarantee making it seem like it’s the only security option they would accept. However, as borrower, you can offer to secure your funding by providing the funder with Step-in rights supported by Insurances, collateral warranties, legal assignment of the main building contract and professional appointments.

On top of the first legal charge on the title of the property, step in rights allows a funder to take over the development to get it completed to pay off the loan.

To ensure that the process of securing finance through insertion of step in right clause goes smoothly and the lender does not withdraw the offer or change the terms of the loan agreement along the way, all of the documents need to be in check. All contracts, appointments of professional team and collateral warranties need to be in the form required by the lender. It is important to remember Borrower must be a party to all agreements and warranties that relate to the development the funding is being obtained for.

Although not every development project will qualify for this form of security of funding, it is worth the effort to try and reach this agreement with the lender as it is a much better and safer way of securing finance for the borrower, instead of risking their personal assets. Moreover, this form of security does not only benefit you but also demonstrates to your contractors and consultants that you made all efforts to ensure that they do not lose their appointment half way through the project.

 

For advice on how to reach an agreement on the best form of security for your development loan that suits your project best or any other construction related queries call us on 07808 772 528 or email us at info@urbanideal.com