Development Finance
In recent years, the commercial property market has begun to see a growth in property development finance requests – these short-term loans can often help individuals in need of cash flow help.
What is development finance?
As the name suggests, property development finance is a financial loan provided to an individual or business to develop or redevelop property. For example, light or heavy refurbishment. It can help you turn a development project into a dream home or profitable investment.
Although large loans are available, some up to £100 million, development loans are segmented into phases and drawn down as the project progresses.
What types of development finance are available?
Depending on the project, there are many types of development finance available. They’re suitable for:
- Commercial, Semi Commercial or residential property development
- New build developments
- Single unit to large multi-unit schemes
- Sales Period Funding
- Renovations and conversions
- Light or heavy refurbishment
- Development exit funding
In some instances, development finance can also be used in the early stages of the project. For example, to finance the land/site purchase and also the build costs.
Who can get property development finance?
While it’s no surprise lenders may be more inclined to provide competitive loans to experienced property developers, it’s not always the case. There are a number of alternative lenders in the market who will consider first time developers. However, regardless of your experience, here are two top tips that we think are well received by lenders:
- Ensure you have done the maths correctly and the project is viable with evidence to justify.
- If possible, instruct a project monitor or professional team to oversee the project to make certain works run smoothly.
Contact our team if you’re unsure about whether you would qualify for development finance. Our specialist team are on hand to talk through your project and may be able to suggest alternative finance if required.
What are property development finance terms?
Property development finance terms are the pre-agreed length of time the loan is secured for. The term of the loan is determined by the time to build and exit the finance. Typically, the term is up to 24 months but for larger, more complex projects, 36 months may be appropriate.
For the loans themselves, they are often arranged on a monthly interest only basis which is paid in full at the end of the term. Sometimes the lender will require the loan to be serviced upon execution of the exit strategy, however this is less common.
What interest rates are available for development finance?
Typical interest rates for property development finance is very broad. The overall stack of finance can vary significantly and is determined by the project itself, namely the size and type.
However, in order to achieve the most suitable rate for your project it’s important to discuss your options with a member of our specialist team. As experienced advisers in property development finance, our team are on hand to suggest which lenders may present you with the most relevant terms.
Development finance and the stack of finance
Senior finance
- 1st charge security
- Interest rates are dependent upon several factors, but typically range from 3-7% per annum
- Arrangement fees and exit fees are between 1-3% in total.
Junior (or mezzanine) finance
- 2nd charge security
- Interest rates are dependent upon a number of different factors, though typical rates vary between 7-20% per annum.
- Similar to senior finance, arrangement exit fees are between 1-3% in total
Equity finance
- The security varies on the structure, but normally equity finance sits behind all other lenders
- Typically, the finance available ranges between 30-50% of the profit of the structure
- The returns offered vary
Why it’s important to have an exit strategy in property development finance
Lenders offering property development finance want to ensure that the money will be paid back in full and on time, therefore it’s important that an exit strategy is in place. For example, this may be the sale of the property which is a common solution we see from our clients. Make sure you have thought about this in advance – lenders will always ask!
Curious to see development finance in action? Take a look at how we helped a first time landlord broaden his portfolio.
If you’re looking for property development finance, or have a project you want to discuss with our qualified advisers call us on 020 7220 5100 or contact us via our online form.