Bespoke Development Funding

The first rule of any property development project is to really understand the local area and the property market there. Which are the up and coming areas? If it’s a university town or city, where do the students live? Where are the best schools? What’s the public transport like? What are the traffic patterns? For larger and more complex schemes, a feasibility study will need to be conducted by a major surveyor, in order to ascertain a detailed understanding of the local micro factors and larger macro factors that could affect the project’s viability.

This way you won’t be building 5-bedroom family homes in an area that really needs affordable homes for first-time buyers, or building student accommodation in an area already saturated, or with a committed pipeline of projects that will satisfy the local demand.

If you are building to rent with a buy-to-let mortgage, study the local economy to make sure that there will be consistent rental demand to cover your repayments.

Okay okay, we know what you’re all thinking now – “well you guys would say that”. Well, yes we would. But it’s also true.

It is impossible for anyone other than a specialist development finance broker to truly exploit the full opportunities found in such a complex and fragmented funding market. There are a myriad of niche lenders, private lenders, family offices, hedge funds, venture capital firms, private equity funds, peer to peer networks, banks and alternative lenders, that without being fully immersed in the sector, you would never know you are getting the best funding option possible for your property development project.

There are other benefits too. The amount of paperwork required for a full development finance application can be daunting. An experienced broker can prepare a well put together and professional funding pack, to ensure your project is seen in the best light possible by the lender, as well as highlighting any areas that may be a cause for concern.

See our section on Why to Use a Broker to see some other good things about us.

Next to your profile as the developer, the lender will pay critical attention to who you elect to use as your main contractor. The wrong choice of contractor could have a terminal effect on your development finance application, especially for larger schemes.

The lender will want to ensure that the main contractor is:

• Experienced in the type of construction that you are proposing
• Has completed schemes of a similar size in the past
• Is familiar with the challenges that your scheme may face; i.e building in Central London in a restricted space with a party wall, is totally different to a straight forward ground up build in a green field.
• Has an established track record, 3 years accounts and a strong balance sheet
• Has sufficient cashflow to float 1 or 2 months costs if so required

Of course, you will be planning to market your properties from the moment you buy the land and get planning. Or, you may be planning to hold the asset and refinance on a mortgage once the build is complete.

However, if you are building a larger number of units, then getting them all sold by the end of the development finance term may be a challenge. In this instance there are a couple of options.

There are companies who will block purchase large numbers of new build properties, sometimes off plan. This not only gives you surety that you can get your development sold, it also de-risks the project in the eyes of the lender, so increases the chance of a successful financing outcome. This is particularly the case for larger speculative developments. Of course, in return for doing this, the purchaser will require a discount from the full market value, but often this is a fair price to pay for the confidence the scheme will be sold.

Another option is what’s called a “Development Exit” bridge. This is a bridging loan that can be used to redeem the last of the development finance, and replace it with a fresh bridging loan facility, pending the sale of the remaining assets.

Be realistic, on everything, because if you’re not, it will come back to bite you later in the process.

Be realistic on your experience level. If you try to get funding for a project that is significantly outside of your past development experience, then the chances of securing funding will be slim.

Be realistic on the valuation. Both for the land value, and the end sales value. We all like to “hope” for the best when it comes to sales, but you should really “plan” for the worst. If you don’t, the RICS valuer doing the residual valuation will, which could end up in disappointment if the profit margins are squeezed, making the project unviable.

Be realistic on the build cost. Again, hope for the best, but plan for the worst. This includes using a sensible contingency, usually around 10% of build cost.

Be realistic on timescales; getting development funding can take up to 3+ months for highly complex large scale developments. For smaller developments, 6 weeks is normal.

Many residential refurbishments and conversions can take place under Permitted Development Rights, especially if the work is internal only; although this will still require specialist consent, it is much easier than submitting a fresh planning application.

If you do need planning permission, it is advisable to arrange it before looking for funding, as it will be much easier to get a loan and negotiate a better rate once this has been granted.

There are specialist lenders who will consider lending on land without planning, or indeed, some venture capital firms will lend on land without planning in a JV partnership with you, on the understanding that you share the upside. However, these options are niche and quite difficult to get, so the best option is to do the hard yards with planning before you start the development finance process.

At the very least you should obtain Outline Planning Permission to provide evidence that it will be possible to build there. However, should you do this, you will only be able to get an acquisition bridging loan until full consent is granted, whereupon you can then access regular development finance.

If you know someone who has ownership of a suitable plot of land, then a joint venture could be an option, whereby the landowner puts up the land, and you, as the developer, build out the site.

In many cases, if you (or your joint venture partnership SPV) own the land, the lender will fund 100% of the build cost. This then presents a win/win situation for the land owner and the developer, with an equitable 50/50 split of the profit.