Benefits of development finance
Key benefits of development finance solutions include:
- Up to 100% of your project costs can be financed
- No monthly repayments, repay when your project is complete
- Options available for both new and experienced developers
- Flexible options to sell or retain properties after completion
- Facilities available for both residential and commercial projects
Development finance allows property developers to access the funding they need to get their projects off the ground. Property development can be a capital-intensive process, and without access to adequate funding, it can be difficult to get a project started.
Facilities are typically tailored to fit your specific needs with funds drawn-down in stages to align with your development appraisal and schedule of works.
Funders are heavily invested in the success of your scheme and work with you rather than against you as they share in the risk of the project. This can be particularly beneficial for smaller developers who may not have the financial resources to absorb the risk associated with a larger development project.
What is development finance?
Development finance is a type of loan that is specifically designed to provide funding for property development projects, such as building new properties or refurbishing existing ones.
A lender will provide the funds needed to start the development, which will typically be provided in stages throughout the development process.
Development finance can offer greater flexibility and scope for negotiation than other types of finance. As the lender is focused on the potential return on investment of the development project, they may be more willing to consider factors such as the location of the property, the potential for growth in the local property market, and the overall viability of the project.
How does development finance work?
Let’s say you are a property developer looking to build a new residential development. You will have your own funds to contribute towards the project but want to approach a development finance lender for the reminder of the funds required.
The development finance lender will typically structure the facility as follows:
- Loan amount: The lender will provide a loan of to a maximum level depending on the value of your project. This is commonly expressed as a maximum LTGDV, for example, “70% LTGDV”. This stands for “Loan to Gross Development Value” and means if your project will be worth £1,000,000 when it is fully built, the funder would lend a maximum of £700,000.
- Loan term: The loan will be provided over a fixed term which will typically be slightly longer than your expected timeline for the construction of the project. This is to give you contingency in case of time overruns and also provide a sufficient window of time to either sell the property/properties, or refinance the facility if you are looking to retain the property/properties.
- Interest rate: The lender will typically charge a monthly interest rate, which will be calculated on the outstanding loan balance throughout the term of the loan.
Options are available for Shariah-compliant finance and for joint-venture solutions. - Security: The loan will be supported by a secured legal first-charge against the property being developed, providing the lender with security in the event of default.
We can source options where additional security is added into the deal to increase the level of borrowing that is available to you. - Staged drawdowns: The loan will be provided in stages, with each stage of the drawdown being contingent on achieving certain milestones in the development process. For example, the first drawdown might be provided once the land has been purchased, the second drawdown once the foundations have been laid, and so on.
We have the ability to assist developers working with less-conventional modern methods of construction such as partially factory-fabricated properties and source solutions with drawdown schedules that work for these projects. - Repayment: The loan will be repaid at the end of the loan term, typically through the sale of the completed properties, or through the refinancing of the loan with a longer-term mortgage or development-exit facility.
- Fees: The lender may charge certain fees for arranging the loan, such as an arrangement fee or a monitoring fee, which will be charged on top of the interest rate. Some facilities may have exit fees. Valuations will typically be required at your cost, along with any solicitors, monitoring surveyor or quantitative surveyor costs. We will outline all costs clearly so you are fully informed of associated charges and can compare solutions properly.
