Proseed Due Diligence Process

Proseed Capital Development Loan Due Diligence Process

You can review Proseed Capital's in-depth due diligence document on this investment here.

The below details all the steps that they take for each opportunity:

1. Initial Due Diligence

1.1 Review of Developer Appraisal

In general, when Proseed is introduced to a target site a Development Appraisal is provided which includes the core project figures, namely; land price, acquisition cost and the proposed build and sales figures for the net saleable area. This initial summary is evaluated by Proseed in order to gauge whether the figures provided by the Developer/agent a) seem reasonable and b) allow for a suitable level of profitability to warrant further analysis.

1.2 Review of Build Costs

Where applicable, for example when a Target Site is to be purchased with planning permission, included within the Developer’s appraisal will be an elemental breakdown of the construction value, scheduling out the build costs and materials to be used in to further detail.

This information is requested from the contractor in their quote to build the development and forms the final contract sum. Proseed use their development experience and knowledge gained from other ongoing projects to evaluate the tendered construction cost to determine whether or not it is reasonable.

This process allows Proseed to produce both a comprehensive and commercially validated financial model.

1.3 Planning Due Diligence

The next stage is for Proseed to evaluate the opportunity by assessing the planning documents. Even in the case that planning has already been obtained, this is still a useful step in verifying the area schedules with the net saleable area per the initial review.

Planning due diligence involves searching the local authority website and finding the planning application, which will normally either have been granted or is in the decision process. Proseed then downloads as many of the relevant documents as possible. These documents include:

• Design and Access Statement (D & A)
• Floor plans
• Site plan
• Elevations
• Area schedules
• CIL and S106 reports
• Other relevant reports

The plans, drawings and the D & A help to provide a clear picture of what the scheme aims to provide in terms of style and specification. The other documents, such as area schedules and the CIL and S106 reports provide precise figures which can be used to create a more detailed model.

When looking through the planning, Proseed will also look through the planning comments which are left by local residents. This is used to give an indication of how the development may sit within the local area – i.e. are residents complaining about the over development of the area or are they concerned about how a ‘local issue’ will be affected by the development (in both cases, these points are then flagged with the Developer).

During this stage Proseed also searches for all of the surrounding planning applications that are relevant to the site. Relevant sites are those which could affect the sales of the target site e.g. a site that is being built, or due to be completed, at a time that could have a negative effect on the Target Site.

1.4 Review Planning Conditions

Planning conditions are found within the terms of the planning decision. Every planning decision that is approved will contain planning conditions. These conditions are essentially a set of rules ensuring that the development matches the accepted application and that the surrounding public endures as little disruption as possible.

Proseed reviews the planning conditions to check whether or not there are any restrictions that could cause a delay or further cost to the build. This provides Proseed with a further understanding of the build cost and build timeline, allowing Proseed to produce a more detailed model and ensure the Developer is suitably prepared.

2. Market Due Diligence

2.1 Conduct Sales Market Research

Market research is a vital part of the due diligence process as this indicated how the Target Sites’ end-product will compare to the market. By comparing it to the surrounding market, Proseed can then forecast a prudent value per unit or a £ per Sq Ft figure, both of which can be used to calculate the GDV.

Using comparable analysis, allows Proseed to gauge the price ceiling for the proposed units and therefore the efficiency of the Target Site.

The market research is conducted using a range of property search engines such as Rightmove or Zoopla - as well as looking through the websites of local estate agents. The search tries to target new build properties within a short distance of the site, as these tend to provide the best comparison to the end-product.

However, in some cases there are no new build schemes in the local vicinity, in which case 2^nd hand stock which is on the market or has been sold is used. Each search aims to target similar properties to the proposed units, covering the following criteria;

Property Specific:

• Number of bedrooms
• Area (SqFt)
• Unit type (flat, maisonette, bungalow or house)
• House type (period, council etc)
• Garden size
• Finish
• Amenity space
• Parking

Location Specific:

• Schools in the area (noting whether the Buyer Profile suits the schools)
• Travel Links (noting journey times to key locations)
• Local infrastructure – i.e. if it is an urban location how close is the Target Site to the town centre
• Length of time that properties have been on the market (this test acts as a ‘canary in a coal mine’ – as whilst the asking prices may be supportive of the proposed scheme, if the units are taking significant amounts of time to sell so they should be discounted when underwriting the Target Site)

If direct comparisons are not available, Proseed uses the best comparable evidence that it is able to find and then applies a discount/premium to them so as to arrive at a credible figure. For example, if the majority of the comparable units are similar in size to the Target Site, but have a large garden, whereas the units in the Target Site have small or no gardens then, subject to local agent feedback, Proseed will discount these comparables to as to factor this variance into the forecast GDV.

The criteria are always different for each development and the search radius varies depending on the amount of local stock on the market. When looking at schemes situated outside of cities/towns, the search criteria is enlarged to include properties within a certain radius of the local town.

2.2 Affordability Evaluation

An affordability evaluation involves creating a Buyer Profile. By viewing the on-market properties, Proseed is able to gain an understanding of the market dynamics and who the potential buyers are likely to be. Once the Buyer Profile has been ascertained (which is also largely informed by speaking with local agents), Proseed can then evaluate how affordable the units will be to the target market.

To evaluate the affordability, Proseed first forecasts the likely mortgage payments (sensitising this against a 10-20% deposit) and then calculates what household income would be required to meet these mortgage payments. If the income to mortgage ratio appears reasonable then the forecast GDV is supported. If it isn’t, the Developer will have to justify how the Target Site will not be hindered by this apparent mismatch. It must be noted of course, that this test in itself will be viewed in the round and the expertise of the Developer will still be taking into account. Proseed only back Developers who can demonstrate a deep understanding of the local market.

2.3 Conduct Lettings Market Research

Lettings market research follows a similar process to the sales market research. This due diligence is used to work out the forecast rental per unit or per SqFt for each scheme. Knowing these figures helps Proseed to guard against any downside that may occur i.e. the ability to hold the asset in case of a downturn.

2.4 Speak to Local Agents

Having completed the desk-based research (and assuming it is positive), Proseed engages with local agents. Proseed will visit the area to gain the insight of as many local agents as possible. Whilst Proseed is able to gain a good picture using online property sites, local agents can have a more current understanding of the local market conditions – for example, local agents can give an impression of the buoyancy of the market by detailing the number of;

• Sales the have made in the past ‘x’ months,
• instructions they are currently working on, and
• valuations that they have in their pipeline

Agents also provide qualitative insight in to:

• Anecdotal evidence on how the local market is performing
• The Buyer Profile
• What type of stock is preferred in the area
• The value of the units
• The housing supply over the previous 12 months
• The amount of activity buying land (this acts as a good gauge for the future pipeline)
• The improvements to the local infrastructure

2.5 Broad economic factors

As well as performing due diligence in today’s market, it is important that we consider factors which could affect the market in the future. These factors could include the potential movement of the interest rates and economic growth. Economic forecasts are monitored to manage Proseed’s exposure to risk throughout the market cycle.

3. Site and developer due diligence

3.1 Site Inspection

Proseed will not invest in a Target Site unless a site inspection has been conducted.

Site inspections allow Proseed to better understand how the Target Site will sit in the context of local market. As well as visiting the site, Proseed will conduct an inspection of the local area taking into account the:

• Standard and type of local housing
• Quality of retailers, restaurants and amenities
• Amount of local development, regeneration or improvements

Proseed inspects all of the factors listed above to provide confidence that the product, which the Target Site aims to produce, will be suitable for the market.

When traveling to a site, Proseed will always use public transport where possible. This helps to provide an understanding of the commute and therefore, the buyer profile.

3.2 Meet the Developer

In the event of a new relationship, Proseed will always insist on meeting the developer.

This allows Proseed to gain an understanding of the developers’ vision, experience and their capability of delivering the development on time and within budget. Meeting the Developer will tend to come hand in hand with a site visit as the Developer will want ensure that Proseed fully understands the Target Site.

We continue to meet Developers throughout projects, forming strong relationships which helps build a stronger pipeline of off-market deals.

3.3 Inspect Developers Past and Current Projects

This continues from meeting the Developer. Proseed checks the Developer’s track record to assess:

• The Developers capability to deliver a project on time
• The Developers capability to deliver a project within budget (this includes researching the standard of record keeping and their transparency)
• The standard of finish that the Developer aims to achieve
• Whether they have delivered a similar scheme(s) in the past
• Whether the Developer has worked in the area before and therefore has a good local knowledge
• How was the Developer introduced to the Target Site

Understanding what other projects the Developer will be working on during the Term of the Target Site provides a useful indication of how much time they can spend on the Target Site.

3.4 Contractor Due Diligence

This is very similar to Meeting the Developer and Inspecting the Developers Past and Current Projects. Developers often choose to act as a development manager and therefore, appoint a contractor. Proseed evaluate the contractors previous schemes to ensure that they are able to deliver the Target Site on time, within budget and to the desired standard.

3.5 Review of the Know Your Client (KYC) Documentation

The KYC document requires the client to provide a selection of personal details as well as providing personal identification and evidence of address. The KYC document is to enable Proseed to comply with Money Laundering Regulations 2007.

3.6 Review of Assets and Liability Statement

The asset and liability statement is used by Proseed to ascertain the amount of security that Proseed is able to gain from the Developer through a personal guarantee. This in itself provides a useful indication of how motivated a Developer is likely to be to meet their obligations under the Facility Agreements.

In addition, further financial due diligence is conducted at this stage which involves checking the Developer’s credit history and annual accounts. These checks help to ascertain the current financial position of the Developer and notably; their ability to remain liquid throughout the project.

4. Finance due diligence

This involves Proseed producing a detailed and robust financial model in light of all the due diligence that has been performed until this stage. The bespoke financial model is used to provide detailed figures and to stress test any of the sensitivities.

The detailed figures include providing a loan to value (LTV) figure, a break-even figure and percentage. This helps Proseed to clearly evaluate the financial risks of the proposed deal.

Testing sensitivities allows Proseed to evaluate the break-even points in respect of variables which can change. These factors include:

- Build cost (£PSF)

- Sales price (£PSF)

- Build period

- Sales period

Following this step, and having received Board approval, Heads of Terms are issued to the Developer.

5. Legal and Corporate due diligence

Following the return of the signed Heads of Terms, the legal and corporate due diligence stage begins.

5.1 Legal and Corporate Due Diligence

Legal and corporate due diligence involves reviewing a series of documents which provide security over the deal for Proseed.

The documents that are required for this stage are agreed within the Heads of Terms and vary between each Target Site.

During this stage Proseed continually updates the in-house Due Diligence Checklist to ensure that all of the appropriate documentation is collected and that completion only takes place when this process has been successfully concluded.

5.2 Insurance

Within the Conditions Precedent of the Facility Agreement, Proseed require that the Developer either produces or amends their insurance for the development to ensure that Proseed or the SPV created to issue the loan is named on the policy. This ensures that in the extreme case of the destruction of the development, Proseed is able to recoup its money and aid the developer in the redevelopment of the project.

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