Development finance is short-term funding designed for the purchase and building costs of a commercial property or residential development project.
In this article, we will look into development finance in more detail, including how to get property development loans.
What Is Development Finance?
It’s a short-term loan, typically with a term from six months to 24 months, that you can use to refurbish or develop commercial, residential, or mixed-use properties.
The loan term should be long enough to enable the developer to purchase the property, develop it, and sell or refinance the debt.
Development finance comes in two parts:
Buying the property or site.
Developing the property (build costs)
If you apply for development finance, three factors determine the actual amount you can borrow:
The initial loan amount to purchase the property or site. This is typically restricted to 65-70% of the value of the property.
Construction cost or build cost. This is the amount the lender is prepared to lend as a percentage of the build cost, typically 90% of the total build cost.
The Gross Development Value (GDV). A lender would generally lend a maximum of between 50% - 60% of the GDV.
Lenders will require much information and paperwork before considering a development loan.
Details of the building, including the current value and proposed purchase price.
The location of the project. Some lenders will only lend in certain parts of the UK.
An appraisal of the development and the building costs.
Details of the planning permission required and any planning permission you already hold.
Evidence of the gross development value. This might be in the form of recent comparable sales in the same or close location.
The applicant's personal details and evidence of previous developments, including how successful they were.
Details of the contractor that will carry out the works.
Details of who will project manage the development finance.
Company structure and an asset and liability statement from each director.
In terms of paperwork, they will want to see:
Proposed designs and drawings of the project
Detailed breakdown of the project costs
Detailed schedule of works
Details of professionals involved (surveyors - building and quantity, etc..)
Previous development experience
A planned exit strategy - how will the development finance be repaid
What Is The Difference Between Development Finance And Bridging Loans?
Bridging loans are generally offered over 12 months and can be used to fund commercial and residential projects. Funds are released as one lump sum at the start of the loan term and are typically released much more quickly, meaning bridging loans are popular when working to a tight deadline.
People often need clarification about the differences between bridging finance and development loans. The similarities are that they are both loans that you secure against the asset being purchased. You can also use them to buy commercial and residential properties, and they are both used to avoid property chain breaks.
When Is Bridging Finance Used?
Bridging finance is generally used when a property needs to be purchased quickly.
The paperwork required is considerably less than that for development finance, and you can often arrange a loan within two to four weeks.
This is perfect for those looking to buy at auction, homeowners who want to move but haven’t sold their property, and those looking to put money into their business.
When Is Development Finance Used?
You can use property development finance to buy a building and/or land and develop it, making it a more valuable asset.
It is considered specialist finance and requires the skills of an experienced commercial mortgage broker.
When Are Funds Released With Bridging Finance?
Once the property has been valued and the legal work completed, funds are typically released as a lump sum, enabling the borrower to complete the purchase of the property/land.
If purchasing at auction, you are required to complete the purchase within 28 days of the auction.
How Are Funds Released With Development Finance?
With a property development project, funds are generally released in instalments.
The first amount is released to assist in the asset's purchase, with further amounts released at certain stages in the project. A surveyor is required to sign off works to enable a payment to be made.
This enables a positive cash flow and makes sure the developer keeps within budget.
What Is The Exit Strategy?
With both bridging and development finance, the lender will want to know what the exit strategy is to pay off the finance. The more reliable the exit plan, the simpler the application process is.
With development loans, there is an option, subject to criteria, to apply for developer exit finance. You can use this if the development finance facility is ending, but the project won’t be complete, meaning you can’t sell the asset for its potential value.
The amount you can borrow with development exit finance is determined by several factors, including the current value of the development as unfinished, the cost of any remaining works, and the expected completion date.
If, for example, the security was a block of flats, you could make a payment to reduce the finance each time you sell a flat. Most lenders are happy for a proportion of the sale proceeds to be kept by the developer, who may want to use the funds for a further project.
How To Get Property Development Finance
Property development finance is considered specialist finance.
To get the best outcome, it is best to speak to a professional commercial finance broker who specialises in development finance. A good broker will have access to numerous lenders and will be able to find the most appropriate one, depending on the proposed project. For example, there may be fewer lenders who will lend on ground-up developments. Others may include an existing property you own to give them further comfort when lending.
It's essential that a developer is fully aware of all terms and conditions, including any exit fees that might apply.
For more information about property development finance, bridging loans or secured loans, contact our expert team today.