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Development Finance explained
What is development finance?
Property Development Finance is normally set up as a short term loan to fund a specific project.
These loans are a funding type used to finance the build, refurbishment or conversion of property and buildings.
When the project and work has been finished the finance is repaid by one of a few ways.
Either sale of the completed project or a refinance. This could be buy to let or a residential, long term mortgage.
There are different types of development funding, from different lenders, depending on the nature of the project.
In some cases your project will need a specialist development lender, in other cases a bridging lender can provide finance that will suit your needs.
You will notice different phrases, as you read which really mean the same thing.
So, development finance, development loans, development funding and property development finance are all the same.
Here are the benefits of property development finance
While some builders and developers like to use their own cash for projects, using development funding does have advantages.
You can get into larger projects.
Using a lenders money “leveraging”, allows you to make you money go further, giving you access to larger projects than you could otherwise afford.
While the amount of money needed for a project will vary, I do have options where you only need to fund 10% of the overall cost.
The development lender will lend you the other 90%, meaning you don’t need to tie up all your capital.
You can then have the rest of your capital available for the next project that come along.
It makes your money work harder.
While using less of your capital obviously means you are borrowing more from a development finance company, will reduce your profit, it won’t be by a huge amount.
Leveraging in this way allows you to use your capital to fund bigger projects for better returns on your money.
They can keep you focused
Knowing you have some debt behind you, with interest going up day by day is motivation to get project finished as quickly as possible.
I’ve had plenty of clients say it’s kept them on it and got them out of that project and on to the next one quicker than they might have done without interest building.
Interest is only charged on the drawn down funds
Unlike most other forms of finance, property development finance is taken in stages. As you complete work, you draw down further funds until the project as completed.
For the most part, interest is only charged on the portion of money you’ve drawn down, so in many cases, development finance isn’t as expensive as you might think.
And, if you can save on your build you don’t need to take all the development facility, so saving you further interest.
How will your development finance work?
As I’ve said above, the development facility is not released in a single lump sum, instead, it’s released in stages as the work progresses.
It’s worth noting the stages are normally in arrears, so you start and pay for the first stage of work the lender will then reimburse you.
You will, if needs be, have an initial draw down to cover the balance of the purchase price.
Further draw downs will require a visit from the lender’s QS who will visit the site and confirm to the development lender the progress is as expected and the amount spent on the project since the last draw.
If your schedule of work changes, or looks like it will change, it is a good idea to let your lender know so they can work with you.
What types of development finance are there?
There are a few different types of property development finance, the sort you need will depend on the specifics of the project.
New build from the ground up –
To fund a new build, you will need property development finance, bridging would not work in this case.
These facilities generally have higher interest rates than bridging and exit fees to reflect the extra risk in this sort of project.
Once a build is wind and watertight it may be possible to move over to a development exit facility. These are, basically, bridging finance that allow for draw downs to complete builds.
The rates and terms are in line with bridging so are lower rate and no exit fees. They can also be taken out once a new build is completed and can both save interest and give a longer period to achieve sales or refinance.
Property refurbishments –
Property refurbishment finance is suitable here, where you are carrying out work to an existing building.
Generally the works would be mostly interior, rather than structural but some refurbishment finance will cater for this, too.
This sort of loan is a type of bridging finance that allows for work to be completed and offers draw downs to cover works to a property.
Property Conversions –
Another version of bridging finance is Conversion finance.
This is for projects where an existing building is being converted to several units or where more complex work is being carried out than for a refurbishment.
When is the right time to apply?
Unless you are buying a site without planning (which can be arranged) most lenders will want the full planning to be in place before they lend.
Typically, I would recommend you start the process as soon as you can once planning has been granted.
It’s always better to have too much time to get a development funding facility in place than be up against a deadline.
Delays often occur so having a buffer of time can be very useful.
If time is of the essence the process can be started before planning is in place but this risks the money you spend if the planning is either declined or there are issues for the lender in the decision notice.
How long will your development loan take to go through?
Development finance has several elements that can all impact on the time it takes for the facility to be completed.
You will have a valuer visit the site to carry out their valuation report, you will also need to provide your detailed costings to the lender appointed Q.S..
You and your lender will also have the legal aspect to go through, so it is very important your solicitor responds to the lender’s legal team as quickly and efficiently as possible.
In my experience inexperienced or residential solicitors can cause delays and hold up the completion.
Ideally, you want to allow 6-8 weeks for completion but if you have a specific date to conclude the process I, and the lender, will work to that where possible.
When do I pay the interest?
Unlike a standard loan or mortgage, with property development finance the interest is normally paid at the end of the project.
If it’s a multi property development, the lender would be paid back the sale proceeds until the debt is cleared. Some lenders may agree to letting you keep some profit for the next project, in some circumstances.
Some lenders will want some or all the interest being paid on a monthly basis. This doesn’t sound ideal but it does save on interest, overall, so leads to a more profitable project.
Where you want, or need, to make monthly payments, lenders will want to see proof of affordability, so it can make for a more complicated application process.
What’s the difference between property development funding and bridging finance?
Bridging has a long history of being used to help buy one property while another is being sold. It has also been used, traditionally, as a way of raising capital quickly with property as security.
Recently developers have been using bridging to pay for the purchase and work on smaller scale or projects where there is little or no structural work.
For projects that have a large element of structural work, or are new build from the ground up a development loan will always be needed.
What is the maximum I can borrow?
The maximum you can borrow with a property development loan is dependent on a number of factors.
Lenders will take into account the end value of the project, the amount required to buy into a project and the relative amount of total cost to lending amount.
Lenders, depending on their criteria can go up to 75% of the purchase price (including estimated interest for the term) though some will go higher. The cost of the work would then be released to you in arrears stages.
Loan to cost:
This calculation looks at the total cost of the project, including all fees and purchase. Lenders will typically restrict their loans to a maximum of 85-90% of cost.
The borrower will be expected to put in the balance using their own funds.
Loan to gross development value (GDV):
This is the amount the project is worth when completed.
Most lenders restrict the loan to be no more than 60-75% of the GDV. The loan amount would include all fees and interest, not just the capital borrowed.
Are the staged payments flexible?
For most lenders the stages you draw down are flexible and they will try and work to your schedule as closely as possible.
Your level of available cash flow will determine when the first and therefore subsequent draw downs are needed.
When you apply for the draw down the lender will send out their QS to confirm satisfactory progress and confirm the amount you’ve spent on the project.
For smaller projects, like refurbishments, the lender may prefer to use a valuer to inspect and keep your draw downs within a percentage of the current value.
Where a Q.S. is used the current value is fairly irrelevant. Lenders know that the real value in a project is when it’s completed so they as long as you are progressing as agreed they won’t be too concerned with the interim value.
Lenders also realise issues can crop so their development finance facilities can be flexible as you progress to make sure your project doesn’t come to a stop due to lack of cash.
What fees will I have to pay for my property development loan?
As you no doubt expect, the various reports and professionals that are needed by the lender to complete a development facility are paid for by you, the borrower.
These include valuers, Q.S.’s (quantity surveyors) solicitors and any other reports the lender will require.
Of course, you also have to think about the interest costs, when calculating the cost of a development finance loan.
The fees you will pay can include:
This is normally the first fee you would pay and one that all development lenders will want.
An RICS (in most cases) valuer will visit the site and give the lender a report telling them the current value of the site and the expected value once the work has been completed.
The report will also give the lender comparables of the local area along with other important information relating to the particular site.
For anything more than a basic refurbishment, lenders will also want a Quantity Surveyor’s report.
The initial inspection will see the Q.S. visit you and the site and go through your costings to give the lender confirmation the figures are realistic and viable to complete the project.
The Q.S. will also visit the site at regular intervals (either at each draw down or every month) to make sure the project is running as it should, to cost and on time.
You will pay for the initial inspection up front, the monitoring inspection costs will be added to the loan.
You will have your own legal fees to cover as well as the lender’s solicitor costs.
The cost here will be determined by the loan amount and complexity of the case you are looking to fund.
Both sets of solicitors will want undertakings their fees will be paid before they start work.
Sometimes known as a facility fee, this is the amount charged by the lender for arranging the loan for you.
Generally this will be between 1-2% and will be added to the loan amount on completion. Depending on lender policy it will be calculated on either the net loan you borrow or the gross loan amount. (This is the loan plus expected interest that will accrue over the term.)
This can vary between 0-1%. I only charge this on completion, so if you don’t take the money I don’t get paid.
Whether or not I charge a broker fee will depend on the loan amount, complexity of the case and whether the lender is paying me a commission.
You will find I do add value to an application so your fee is well spent! I can get you in front of the right lenders quickly and am able to arrange you favorable terms that might not be available if you go directly.
My extensive knowledge of the market can also work to your advantage when considering lenders and products you aren’t aware of.
Non utilisation fees:
This is effectively a form of interest. Lenders that charge this on their facilities are charging you for money you have arranged but have not yet borrowed.
These are less common than in the past.
Property development loans tend to have exit fees, though bridging loans and their variations tend not to.
The amount is generally 1-1.5% of the final or peak loan balance, though some lenders charge it against the GDV.
It is worth watching out for the exit fee against GDV – this can make a lower rate facility much more expensive than you might be expecting.
Draw down fees – you may be charged admin fees for each draw down to cover the lender’s time
Admin fees – not all lenders charge them but those that do will vary from a few hundred to £2,000.
Transfer and other bank fees – these are generally small amounts to move money from one account to another, normally charged at cost of around £35.
Will a lender cover 100% of all project costs?
There are a small number of lenders who offer joint venture property development finance.
You would need to cover some initial lender costs and have working capital but I do have an option who will lend the whole amount.
This is, admittedly, an expensive way to borrow as you will have interest and a profit share at the end but it can be a very valuable tool.
The other way to raise 100% of the costs is to enter into a joint venture with the land/site owner. If they are willing to defer some, or ideally all of the purchase price you can use that as the equity for the loan and borrow 100% of the build costs.
Who do you go to for property development finance?
The bridging market has grown enormously since the credit crunch and while it’s not as big the property development market has also grown.
The is no shortage of lenders offering bridging in their various forms, full development finance lenders are less common.
High street banks –
These are, obviously, the banks that are household names and have a high street presence.
For banks to be able to lend to you generally requires plenty of experience and a good size deposit as they are the most cautious of lenders.
The hurdles you need to jump through to work with them is rewarded with the lowest rates so there are advantages to using them.
Challenger banks –
These are the second tier of lender who are banks but not on the high street or as well known.
They are more flexible than their high street counterparts and they also have competitive rates.
They are, though, still very “picky” so they won’t take too much of a risk either on loan amounts or applicants.
Specialist property development finance lenders –
A growing sector is this part of the market.
There’s a wide range of options in this area with some very attractive lending options. The rates are generally a bit higher than the challenger banks (though not always) but the application criteria is much more flexible.
These lenders will fund first time projects, as well as experienced developers with higher loan to values and loan to costs.
With a wide range of property development lenders I can help steer you to the right options for your project.
Bridging lenders –
Ideal for smaller scale projects most bridging companies don’t offer full property development finance.
For projects like new build you will need the above but if you’re doing a conversion or a refurbishment, bridging can be a great tool.
With a lot of lenders competing for business, the rates have fallen dramatically over the last few years.
They offer quick, short term options that developers can take advantage of for their projects.
Why would I work with a broker?
When you’re in the market for property development finance you could certainly go directly to a lender and arrange the finance yourself.
Whether it’s your first time developing or you have an existing lender relationship, how can you be sure you’re getting the best option for you and your project?
It’s also worth bearing in mind while no one wants to overpay, rate should not be the one determining factor.
The cheapest rate in the world is no good at all, if you can’t get access to the funding you need, when you need it.
Why Build Capital and Tim in particular?
And, as this is a specialist market so you should work with someone with experience.
The great news is I’ve been in this section of the industry for 17 years so I’ve learnt a thing or two about who you can trust, who is easy to deal with and who offers genuinely great terms.
I am down to earth, honest and as a business owner myself, I understand the importance of not having time wasted and offering false promises. You can check out the testimonials (all real), or even better give me a call.
You can have a no obligation chat on 01492 233 808 (direct to me, not a call centre) or 07930 653 209 to talk about your project and how I might be able to help you.
If you’d prefer to email I am on email@example.com .
Some property development finance criteria
Do I need to have planning?
To start an application, no. You can, if you want, begin the development finance process before planning is in place.
To complete, though, it will need to be granted. There’s a few simple reasons:
Lenders will want you to get started within a certain period once the funding is arranged, so if the planning is not ready you won’t be able to.
If you’ve got a facility and you’re paying interest but can’t start, you are wasting time and money and, it risks you going past the loan term.
And, finally, as planning is never guaranteed there is a risk it won’t be granted which would leave you and the lender in a difficult position.
I’m a first time developer, can I get development finance?
As a first time developer there are some lenders who wouldn’t fund you but don’t worry, I do have plenty of options.
Depending on your experience (including for clients or an employer) you may need to employ a main contractor.
But as long as someone running the project can demonstrate their capability I will get you development funding.
How about for adverse credit?
This is possible, yes.
Of course, if you’re bankrupt that’s not possible but for other situations such as CCJ’s I can get you development finance.
High street bank and challenger banks will be less keen to lend with adverse credit but others will look past it.
You may be asked for explanations as to what the issues were and what you did to rectify the situation but for most lenders the main thing is your experience and the quality of the project.
Can you fund my part built development?
Part built projects are not for every lender but I can fund them.
Development finance lenders would much rather fund a whole project than come in part way through.
If it’s something you’ve self funded to the point you apply they probably won’t be able to see Q.S. reports to show progress and it’s more difficult to verify the work that’s been done is to the right standard.
If you are re-financing to a new development lender you can probably show copy reports which will give the new lender more confidence to get involved.
It’s a case by case basis, but with such a wide panel I will likely have someone to fund your project.
Yes, of course I can fund these, as long as the relevant paper work is in place.
Permitted development has become a very popular option and lenders are keen to fund them.
As with any project, I have options for first time and experienced developers, it all comes down to the details of the particular development project.
Bridging is often a good option here as the developments don’t tend to require much in the way of structural work.
Will I be able to qualify for property development finance?
With so many development and bridging lending options in the market, the chances are I can find you funding.
As I’ve said above, lenders have their own criteria and look for certain things in a project before they fund it. It might be a minimum level of cash, experience or location.
As long as a project makes sense and you’ll make money from it, every issue generally has a way around it. If you lack experience you can get a contractor, if you aren’t putting enough capital in for one lender another could live with less.
I don’t like to say no to any project so I always make sure I work hard to try and find a solution for you.
When do I repay the development loan?
For the most part you won’t make monthly payments during the development loan term. This isn’t like a standard mortgage or car loan.
Repayment will come either at the end of the project or if you refinance away to a new development lender.
Sales: This is obvious enough, you sell to either a third party or your own holding company, repaying the lender in the process.
Refinance: This can happen either at the end of the project, where you arrange a long term buy to let or commercial mortgage.
You can also refinance part way through a project, onto a development exit product.
Development exit is available when a project is wind and water tight. The risk of the project is then reduced so development exit lenders can offer you lower rates than a development project.
They can also be used at the end of a project to “buy” yourself another 6-12 months to achieve sales so you don’t have to sell off at a lower price to stay within term.
Are there downsides to developing property?
There are risks to development, of course.
Changes in the market, recessions, lack of mortgage options and many other external forces can have a negative effect on your development.
You need to be aware of the pitfalls before you enter into a development finance agreement as regardless of whether something is your fault or not, the lender will expect full repayment, plus interest at the end of the term.
The application process will cost you in fees and there is no guarantee it will be successful.
Any of planning fees, valuations, Q.S. and legals will all require you to pay fees but any one of them being negative may well stop you being able to get property development finance.
Before you are able to draw down funds you will need to put in some background work, such as putting together detailed cash flows not to mention finding a good site to start with.
Your figures need to be realistic, too. I have seen numerous clients who have over estimated the end value of a project or under estimated the cost of the development work.
Doing either will run the risk of you spending money on reports but not being able to get the development funding you are looking for.
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