Quite a few successful developers have actually failed spectacularly before coming back to be successful in a second life.
Property Development is in some ways a calling rather than something people plan to do and it attracts players from all walks of life. As a result, there is a diverse roll call of participants with varying levels of capability and expertise attempting to create product and turn an honest dollar. Most have a level of entrepreneur in their make-up and make a go of it, some spectacularly so and equally some struggle while a few fail financially for varying reasons.
One key to being a successful developer is an ability to recognise the skills you lack and to either employ or contract them in order to provide a properly rounded service proposition. Developers who fail are not necessarily incompetent or poor at what they do. Their failure can often be a result of unforseen market changes combined with poor choices in deal selection, consultants and or project partners. While it can be argued that those factors should have been foreseen, the reality is that we all learn from mistakes and developers are no different.
Many of the successful developers we deal with at HoldenCAPITAL understand that they narrowly avoided failure in the past by combinations of good timing and luck combined with an ability to recognise what happened and take the steps needed to ensure they don't repeat them. Some of them have actually failed spectacularly before coming back to be successful in a second life.
So, for those that have been bitten by the development bug but recently suffered from a less than successful experience and are now faced with rebuilding their careers, what is the secret to overcoming these setbacks?
Many of the HoldenCAPITAL team have considerable experience in lending institutions and in our experience, the key requirements to affect a comeback are predicated on:
- How you dealt with the initial setback, which largely comes down to how you resolved your position with your financier and other creditors; and
- How you present your strategy for your new project to your would-be financiers/investors.
Often as not, the first part is history and we can only advise that the key to your future success is best served by recognising that you were responsible for your own situation. Regardless of how you perceive the reasons behind the fact that the banks or your creditors took control of your financial future, the reality is it is not their fault, or that of the marketeer who took your money and then failed to deliver the required settlements or anyone else for that matter.
The buck stops with you and the best way forward is to ensure that the people who invested money and time in your past ventures get as much of their investment back as you can possibly achieve by assisting them in their efforts (and maybe there is something left over for yourself). Even if that is not feasible, ensuring your future reputation by doing the right thing is an important part of the process and in some ways is the single most important thing you can salvage.
Lenders have long memories for both good and bad clients and in most cases their Risk Departments (or those of any bank in fact), will be more prepared to roll the dice again with a client who has worked to get them their money back in priority to their own interests. It's common sense really but the old saying that he who has the gold makes the rules applies is an important one to remember. Play by the rules and you can still be invited back to play.
Sometimes even working with your financier cannot save you from paying the ultimate price such as bankruptcy or a Part X arrangement but even the stigma associated with these outcomes may not signal the end of a career in development. Again, if you can demonstrate that the decisions behind those arrangements were taken for reasons that did not adversely reflect on your character or a willingness to co-operate, there may still be a future for a come back developer.
Where possible it is preferable to arrange a Personal Insolvency Agreement with your creditors (commonly called a Part X) rather than bankruptcy as this allows you far more freedom in terms of resurrecting your business aspirations.
For the uninitiated, bankruptcy is a legal process which usually results from an action by creditors against a person unable to pay their debts or liabilities under a guarantee. The action usually occurs after a period of negotiation between the parties and can be initiated by either side.
The process involves the court appointing a Trustee who investigates the bankrupt’s affairs and then acts to recover and sell any remaining assets with the surplus distributed to creditors as a dividend to repay outstanding debts. The Trustee can also recover monies from a bankrupt if their income is over a certain threshold.
A bankrupt is normally discharged three years after they file a Statement of Affairs, which sets out their financial position for the trustee and creditors to examine. If the Trustee is not satisfied with the conduct of the Bankrupt and can show that they are failing to co-operate with the terms of their bankruptcy they can seek to have the term extended. Failure to lodge a Statement of Affairs can result in the bankrupt continuing indefinitely.
Given the social stigma associated with bankruptcy, many developers faced with this situation opt to negotiate with their creditors and banks and seek to enter into a Part X. This allows them to cut a deal with their creditors by entering into a mutually acceptable repayment arrangement. Often this results in the debtor being able to retain some smaller assets, which would enable them to rebuild their careers in return for a less costly and faster settlement via the sale of significant assets.
The other positives to this option are that arrangements can be structured to meet the differing needs of all the parties involved and a creditor cannot act to recover debts while other creditors are reviewing the agreement. The process involves a debtor submitting a Personal Insolvency Agreement, which is a proposal for repayment or partial repayment of debts based on the debtor’s capacity, together with a Statement of Affairs which details the debtor’s asset and liability position and income prospects. A Trustee will again take control of and review their financial affairs for an agreed period, as well as reporting to creditors on the debtor’s capacity to meet the proposed repayment arrangement.
This process is generally more flexible than bankruptcy, has a less detrimental impact on a debtor’s credit rating and carries a considerably lesser stigma than bankruptcy when the debtor is looking to raise credit later on. Creditors are more accepting of this approach especially where they perceive that the debtor is being fully co-operative, particularly as it usually results in the distribution of higher dividends due to less costs and is generally a quicker process.
Unsecured creditors are bound by the agreement once it is voted on and accepted by a majority, of creditors, however secured creditors retain the right to recover and sell property under their security agreements. Any unencumbered assets (usually minor) that were agreed not to be subject to the Personal Insolvency Agreement are then available to the debtor to utilise for their own benefit.
In making a ‘come back’, it is important to remember that you cannot act as a director of a company while still subject to a Personal Insolvency Agreement or bankruptcy order. In most cases this will mean that a lender will require that you act in a consultancy role only with an acceptable ‘financial’ party acting as the principal borrower/guarantor. This does however provide an opportunity to regain market credibility if a suitable ‘partner’ can be found to participate.
Once the Personal Insolvency Agreement or bankruptcy order has been complied with, a debtor is free to obtain credit, however they do need to advise would-be lenders of their history in order to re-establish their record. While some lenders will have policies which limit their ability to lend to someone with a history of this type, others will be more flexible, particularly if the full details are explained at the outset. In some cases creditors are prepared to give references, which support the debtor further enhancing their prospects. One thing that will always result in a bad outcome is to not declare your past history. This will always result in mistrust and a flat NO!
There are many current developers who have had the misfortune to experience one of these processes and still managed to establish a successful business. In most cases, they were co-operative with their creditors and made a genuine attempt to repay what they could to creditors. Most importantly, they almost always worked with their lenders to help them recover their debt against the property in question, resulting in many cases in those lenders being quite prepared to lend them money on new projects.
So to recap our earlier recommendations: How you dealt with the initial setback is critical.
- Don’t blame the lenders and everyone but yourself;
- Do work to help the bank and your creditors recover their money; and
- Try to negotiate a Personal Insolvency Agreement to provide a basis on which to re-establish your future projects and lessen the credit stigma.
How you present the strategy for your new project to your would-be financiers/investors needs to be based on:
- Full and frank disclosure of your financial position and past credit history;
- Supported by character references from your past dealings, particularly if they relate to your efforts to resolve past failures.
If you believe that you satisfy these criteria but are uncertain about how to go about identifying a lender who will provide a fair go, the team at HoldenCAPITAL can help prepare your submission to achieve a positive outcome.
This article was written by Dan Holden of Holden CAPITAL.