Development Finance has been a growing trend in the Commercial Property market over the past few years. As a result, there are currently many developers with finance that is due to expire in the next three to 6 months.
With the property market in an uncertain position, there is pressure for these developers to find a way to exit their development finance and release their tied-up equity to move onto their next project.
If you find yourself in this position, the good news is that various hybrid products have emerged in the market which combines a term mortgage with a bridging loan. This allows developers to release their tied-up equity, and importantly, at a cost-effective rate (currently between 5% and 7% per annum). These products can be used on or before practical completion allowing the developer to move on to their next project or simply to refinance their existing debt.
Typically, developers will have borrowed up to 60% of the GDV (Gross Development Value) of the project and will sometimes want to extract their equity, as an example, from 60% to 75%, thus get an extra 15% to put towards their next project.
The additional consideration with this product is that the developer still leaves 25% equity in the project. By way of an example, let’s look at a developer borrowing 75% of a £10m development which consists of 10 properties. If they were to sell one of these properties for £1m, the developer will technically have £250k equity. However, the bank will normally insist that the full proceeds of the sale is retained to reduce their £7.5m loan to £6.5m.
Through using a developer exit, a deal can be negotiated where the developer can typically get up to 75% of their 250k equity back after the sale of each unit.
If you’d like to discuss development exits with one of our advisers, get in touch here.