Property
Development
Finance.

There are multiple factors that lenders will look at when deciding whether to offer you a loan, such as developer experience, your credit profile, what you are planning to build, the demand in that location, land cost, development costs and profitability, the gross development value (GDV) how you intend to repay the loan and importantly, how much cash/equity you are willing to commit to the project.

Property development loans that are not residential fall under the commercial category, which can cover office blocks, hotels, factories, and everything in between. Unlike with residential funding, a commercial development finance lender will often require some form of secured exit from the loan, before work commences, such as a contract with a hotel operator, or a lease agreement from a company with a strong covenant.

Commercial development finance is typically available as follows:

• UK.
• Maximum LTC: up to 85%
• Minimum Loan: £100k
• Maximum LTGDV: up to 70%
• Maximum Loan: none
• Rates: from BBR+ 5% PA
• Term: up to 48 months +
• Senior investment loans also available

Mezzanine development finance helps you to access more money than a senior lender can typically offer and allows you to invest a minimal amount of equity into a project with no profit share required.

Joint Venture or Equity development finance allows you to take advantage of promising property development opportunities by pooling your resources with other investors to finance a project to its completion.

The first rule of any property development project is to really understand the needs and wants of potential buyers. Which are the up and coming areas? If it’s a university town or city, where do students live? Where are the best schools?

For larger schemes, it is important to perform a feasibility study and understand all the factors that could affect its viability. The surveyor will need to analyze local micro factors as well as larger macro factors in order for you to make an informed decision about the likely success and profitability of your project.

This way you won’t be building 4-bedroom family homes in an area that really needs affordable homes for first-time buyers, or building PBSA student accommodation in an area that is already saturated or is actually in need of HMO accommodation for a local professional workforce, such as close to a hospital.

Don’t expect the lender or valuer to be optimistic or give you the benefit of the doubt.

There is a myriad of niche funders, development finance platforms, family offices, hedge funds, venture capital firms, private equity funds, alternative lenders, and banks that can offer funding opportunities to you. These types of financial institutions all have their own quirks and nuances. It’s impossible for anyone other than a specialist development finance broker to truly exploit the opportunities found in such a complex and fragmented finance market place.

It is often the case that refurbishments and conversions use permitted development rights as the planning mechanism by which consent is attained for the project.

If you do need planning permission, you will be unable to apply for the loan until this has been granted, except in the case where you are using a bridging loan to acquire the site, while the planning process runs its course.

Therefore, it is a good idea to use the services of a specialist planning consultant who can get a pre-application advice advisory from the local planning authority, which will give you a good indication of the likelihood of your planning application being successful.

As well as your experience as the developer, the lender will also pay close attention to who you have selected to be your main contractor.

The lender will want to ensure that the main contractor:

• Has experience in the type of project you are proposing.
• Has built a project of comparable size before.
• Is familiar with the type of challenges that may be faced with your project, such as with period buildings, barn conversions, party walls, inner-city construction.
• Has 3 years of profitable accounts and a decent balance sheet.
• Has sufficient cashflow to float 1 or 2 months costs if so required.

The smooth running and efficiency of your transaction will be most heavily influenced by the experience, motivation, responsiveness, and professionalism of your solicitor.

The lender’s solicitor is motivated because they want to keep the regular business from their client. You are motivated because you want to do your deal. The finance broker is motivated because he wants to get paid. However, your solicitor gets paid regardless, you are just one of many clients, and he or she probably doesn’t give a fig whether your deal completes or not, or whether it happens in 3 weeks or 3 months. You must choose wisely, or it can be a very painful process.

Foremost in the mind of the lender is how they are going to be repaid. Depending on the scheme, this can be one of several ways, which may or may not need to be evidenced to the lender before completion of the loan.

Of course, the most common would be to sell the development once it has been built. For smaller schemes, this may mean just advertising off plan as soon as possible with a local agent. For larger schemes, this may mean building a show home, and sourcing pre-sales from a local housing association, or specialist off plan house buyer.

If using a refinance as the main mechanism to repay the development loan, then the lender may require a decision in principle or offer letter, to prove that this is a viable exit solution.

In some cases with a commercial development, such as with a hotel, office or shop, you may be building the project on the basis that it will be tenanted when complete. If this is the case, the lender will need to see some form of contract/LOI/lease agreement, to evidence that your exit is suitable.

Development exit finance is also available for both refurbishment and new build ground up developments when the developer wishes to repay the development loan and release some equity contained in the project. This is short term loan rather than a mortgage pending sale of the property.