Development Exit Finance
Development Exit finance can be used in a few ways to clear your development finance facility.
You can pay off a development loan on a completed project. This will reduce your rate and give you time to achieve the sale price you want.
Or, once your build is wind and water tight you can clear the development loan and get a lower rate facility. You will still receive funding to complete work and an extended term to get your sale.
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Development exit finance explained
What is development exit finance?
Development exit finance is a used to repay existing property development finance, when a project is either near to or is completed.
It is a form of bridging finance provided by short term bridging lenders.
As with most bridging, development exit finance is available with interest roll up, which is where interest is added to the loan or the interest is retained.
With either method, you don’t need to make monthly payments, the interest is paid back at the end of, or before the end of, the loan term.
What is development exit finance used for?
There are a number of ways developers use development exit finance.
If you have finished a project and the development loan term is coming to an end:
If you’ve finished a project and sales won’t complete in time an exit loan will give you extra time to sell.
This gives you time to make sure you get the best sales price and also stops you going over term with your current loan which may lead to costly penalties.
Reduce interest rate before the project completion:
Some development loans can have relatively expensive interest rates.
Once a project is wind and water tight the risk is much reduced so development exit finance lenders are willing to lend at lower rates.
This will clear your current debt and give you the additional finance you need to complete the new work.
If you have sales agreed but they are taking time to go through a development exit could give you the funds to raise the capital you need for your next project.
The interest will be payable at the end of the loan term so your cash flow needn’t be affected.
Costs of development exit finance
As with any loan, development exit finance comes with various fees and charges you need to consider.
The obvious first consideration is the interest rate.
The biggest driver here is the loan to value you need to borrow. Lenders generally charges their lowest rates for facilities that come in at 50% or under.
Rates here, at the time of writing, can start as low as 0.45% per month. Rates will increase up to lender maximums of 75-80% loan to value.
Though you may look to take out a 12 month term, if you repay early you will only pay the interest for the time you have had the loan.
Are there any fees I need to consider?
Like a standard bridge, there are some fees you are likely to be charged:
Lender arrangement fee:
This fee is charged by the lender to set up the loan.
It is generally 1-2% of the gross loan amount and will be added to the loan, to be repaid when you clear the facility.
Lender legal costs:
You will be liable for the lender’s legal costs, as well as your own. The cost can vary depending on the complexity of the application.
You will need to provide an undertaking to pay these costs, which usually means paying the funds to your solicitor who will hold on to them.
If the loan completes the legal fees are normally added to the loan and you get the undertaking funds back.
If the loan doesn’t proceed the solicitor will charge for the work they have carried out, taken from the fund your solicitor is holding.
Another fee you are liable for is the valuation report to be carried out.
Most lenders will require an RICS registered valuer to inspect the property and confirm both the condition and current value.
This fee will be payable at the start of the process and wouldn’t normally be added to the loan.
Some brokers will charge an additional fee for their work.
In these cases I don’t, where you are being charged it will normally be 1-2% of the loan amount.
How much can I borrow?
There are a few things to think about here.
There are development exit loans available from small loan amounts (in theory £25,000) upto multi millions.
Of course, the circumstance of your project will determine what amount you need and would be offered to you.
Loan to value:
LTV as it’s known is the maximum loan available in relation to the value of the property.
This is calculated in percent terms, with the maximum being 75-80%. Different lenders have different options.
Will I need to make monthly payments?
No, the interest is either rolled up (added to the loan each month) or deducted from the gross loan amount the lender gives you.
It’s worth keeping in mind the maximum loan to values take into account the interest that will accrue over the term.
The net loan, therefore, will not be at those levels unless you can make monthly payments ie. service the loan.
Where to get development exit finance
Direct to lenders:
As development exit loans are a form of bridging, the bridging market is where you need to look.
Not all lenders provide development exit finance but more and more are as it becomes a more common tool for developers to use.
If you know the market and have the time to commit, you could go to some of the lenders yourself, directly.
There are some risks involved in doing that, unless you have a detailed knowledge of the market.
Using a broker:
I have worked in the short term finance business for over 17 years and over that time I have developed a quality panel of lenders who are able to help with all kinds of finance, included development exit loans.
Regardless of what you need from a development exit, be it speed being the important factor, rate or low fees, I can put your proposal infront of the right lender very quickly.
Initial decisions in principle can be arranged same day in some cases and quick completions are possible, too, making sure you get the capital you need, when you need it.
Development exit finance criteria
Who can borrow development exit finance?
I work with limited companies and LLP’s though lenders can also lend to individuals and pensions.
I am a first time developer, can I take out development exit finance?
Yes, as with first time development finance, we have lenders who will fund first time developers.
As with the development finance you will have taken out before needing an exit loan, lenders may want to have a main contractor in charge of the site or a project manager.
What information would I need to provide for development exit finance?
The exact information needed for development exit finance will depend on the circumstances of your case.
If you have completed the project and are just looking to buy time while sales come through you will need less than if you are part way through a project.
For part built schemes, the planning information will be needed and details of your experience or your contractors details.
For all enquiries lenders will want to see warranties in place and that the various build stages have been signed off.
In addition you may need to provide costings and details of work to be completed.
All lenders will need to see your ID and Proof of residence with other information required on a case by case basis.
Development exit finance process
When should I contact you about development exit finance?
The easy answer is whenever you are ready, though keep in mind any quotes or information I provide would be valid at the time of enquiry. If you get in touch 6 months before you want to start applying, the details may change.
If you are refinancing a completed project a month would normally be plenty of time.
However, if you are partway through a project you will probably need to leave longer as the lenders may need reports doing that take up time. In these cases 6-8 weeks is sensible.
For any timescale it is important your solicitor works quickly with the lender solicitor.
How is a part built site valued?
For any development exit finance application a valuation will be needed.
For a completed project this is very straightforward but if you are applying for a part built site it is more complicated. That said, any competent valuer will be able to work with the lender to provide a report.
Part built projects are valued on their current value, while also considering the end value when work has finished.
The current value would be worked out as the end value, less the cost of any remaining work and an element of profit for the developer.
Do lenders take 100% of the proceeds of each sale?
Not always, there are development exit facilities where you can keep some of the proceeds of each sale to help you cashflow, rather than repay the lender in full first.
Are there any early repayment charges?
Bridging is a very competitive market at the moment and as development exit finance is basically a bridge the answer is normally, no.
Depending on circumstances there may be exit fees but we can discuss those when we talk about your particular project and requirements.
Will I get a better rate on a completed project?
Completed projects are less risky than a part built development so the best rates are saved for those enquiries and those at the lower loan to values.
I can find you very good rates on part built schemes, too.
Ultimately the best rates and terms I can find for you will depend on your specific project and circumstances.
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