Reducing Lender Risk on Developer-Builder Projects

While lenders have traditionally shied away from the developer-builder model, it remains extremely difficult to get a project off the ground with a third-party builder in many sections of the market—this has forced lenders to reconsider their position.

But although many are now warming to the idea of funding developer-builder projects, the underlying risks that have long made lenders cautious still apply.

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—delivery risk becomes credit risk. 

Governance is another challenge. When the developer and builder are one and the same, the lender must rely on borrower-supplied information, not ideal when one of the primary risks to the lender is the potential for the building entity to divert funds to other projects they’re engaged on.

Automation of financial oversight processes for lenders and borrowers

Lenders already require additional oversight to counter these risks. But not only do these extra checks create a significant administrative burden for both parties, their reliability is determined by what the borrower chooses to share.

Multiple non-bank lenders are now using IPEX to automate financial oversight processes.

IPEX places practical limits on how the borrower/building entity can use progress payments; only subcontractors, suppliers and consultants linked to the project can be paid from the account.

And rather than relying solely on a ‘stat dec’, lenders can now cross-check and verify critical subcontractor and supplier payment information against the previous month’s certified claim before releasing further payment.

Trilogy Funds senior portfolio manager Henri Hines said they had many great, long-standing relationships with developer-builders. “But there’s no question that this model can add an element of risk for us as financiers,” Hines said.

“Managing this additional risk can also create a great deal of extra admin for both parties. 

“IPEX allows us to automate payment oversight and integrity checks, delivering better governance, earlier risk detection and enhanced investor confidence.”

Of course, as IPEX eliminates manual oversight checks by the lender, it also removes the administration associated with ‘proving’ compliance from the borrower—a big win for both. 

Cap risk and give ‘teeth’ to existing legal protections

Not only is payment transparency proving to be an active deterrent to ‘borrowing’ against a project to cashflow another in distress. It also provides a natural ‘go/no-go’ checkpoint each month, immediately capping lender risk to a single payment. 

If those included in the previous claim are yet to be paid or have been paid considerably less than progress on site suggests they should, it can be identified and addressed immediately.

In the case of more serious or repeated breaches, payment transparency means that the lender has all the information they need to act on existing contractual rights.

Payment audit trail in an insolvency event

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. 

Not only is chronic non or under payment of subcontractors and suppliers far less likely to be an issue, lenders will also have access to the complete project account transaction history, including all subcontractor/supplier contract values, payment dates and amounts.

This audit trail removes much of the work associated with substantiating creditor claims and establishing your exact position on the project. 

Reducing lender risk also benefits developer-builders

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.

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—the IPEX platform blocks payment if entity/bank account details don’t match

• The lender receives an agreed level of payment transparency*, allowing them to verify that those linked to previous claims have been paid before releasing further funds

• The lender can view and, if necessary, approve of any payment due to the developer and/or builder entities i.e. payment for preliminaries, margin, fees or other direct costs

• The lender has the right to escalate the level of oversight and control under a ‘financial distress’ event.

*Standard developer portal view expressed payments made to each subcontractor and supplier as a per cent of contract value. Open book developer portal view shows subcontract/payment values.

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