Why pre-lets matter
A speculative commercial building has no income until a tenant is found, and its value on completion depends on assumptions about rent and letting time. A pre-let fixes the rent and the tenant before construction, so the lender can value the finished building as an investment with confidence. Some commercial development lenders on our panel only fund commercial schemes with a pre-let or pre-sale to a strong counterparty.
The strength of the tenant matters as much as the existence of the lease. A national business or public body on a long lease supports a higher value and better terms than a new business on a short lease.
Agreement for lease and forward sale
A pre-let is usually documented by an agreement for lease, under which the developer builds to an agreed specification and the tenant takes a lease on completion. Lenders' solicitors will review the conditions, the specification, the long-stop date, and the tenant's rights to walk away if the building is late or does not meet the specification.
A forward sale or forward funding agreement sells the completed building to an investor. Lenders look at the investor's ability to complete and the conditions to completion. In some forward funding structures, the investor funds the construction directly.
What lenders look for
Commercial development lenders typically want:
- Planning permission and a clear specification agreed with the occupier
- A main contractor on a fixed-price contract, often with performance bonds and collateral warranties for the tenant
- An investment valuation based on the agreed lease, and a view of the value without the tenant
- A development track record in the relevant sector
- A meaningful equity contribution
Loans are limited by a percentage of the gross development value and of total costs, and are usually larger than for small housing schemes.
Exit and arranging finance
The exit is usually a sale of the let investment, completion of the forward sale, or a commercial investment mortgage once the tenant is in occupation and paying rent. We compare commercial development lenders on appetite for the sector, the tenant and leverage, then approach those that fit with a clear case. Final terms depend on each lender's valuation, monitoring surveyor and checks.
