What Is Property Development Finance?
Property development finance entails a short-term loan specifically designed for residential property development ventures, including construction projects. These loans are often between 4 months to 2 years. Typically, this type of financing comprises two components: a loan for land acquisition and subsequent stage payments to cover development expenses, such as property conversions into flats or HMOs.
At BIG Property Finance, we can provide finance to carry out the refurbishment or construction of a project, as well as contributing to the property value/purchase. We offer property development finance of up to 78% loan to costs, including land value, construction and fees. This product is available to individuals and companies with a track record in development and/or refurbishment.
In this article we will be exploring how development finance differs from other forms of short-term lending, types of projects and the key components to a development loan.
Understanding Residential Development Finance
What is residential development finance?
The initial part of development financing is dedicated to the acquisition of the development site. This could include purchasing land for the construction of new properties or acquiring an existing property for refurbishment. This phase kickstarts the financial underpinning and provides developers with the capital needed to secure the basis for their development vision.
The second pivotal stage revolves around funding the actual construction process. This part of the loan is disbursed in stages, often aligning with the progress of the development project. Rather than receiving the entire sum upfront, developers receive funds at specific intervals, often on a monthly basis or in line with construction milestones.
Differences between development finance and traditional mortgages
Whilst a traditional mortgage would be secured against an existing building in good ‘mortgageable condition.’ Development finance can be secured against land, structures intended for demolition or properties requiring significant refurbishment. A mortgage would also be a single advance of funds to be paid back over a long term basis, such as 25 years, whereas development finance is only intended to be held for the duration of the construction works, repaid on completion of the project, normally within 2 years.
When and why development finance is used
Development finance is primarily used to fund building projects of either ground up developments or significant property refurbishments. With residential projects, funding would be acquired to assist in the building of houses or apartments intended for the occupation as someone’s domestic dwelling. The loan funds would support the funding of construction works, planning fees, surveys and potential marketing costs.
Types of Residential Development Loans
Development Finance facilities can vary greatly and with them, the appropriate type of development finance loan varies to suit. Here are some examples of types of development finance:
Construction Finance
For those looking to build new properties or developments from the ground up, construction finance provides the necessary capital for every stage of the project. From land acquisition to project completion, this financing option ensures seamless progress and efficient use of funds.
Refurbishment Finance
Renovating existing properties to enhance their value? Refurbishment finance supports property upgrades, renovations, and improvements. Whether it’s a residential property, commercial space, or mixed-use development, this finance streamlines your refurbishment plans.
Conversion Finance
Converting properties from one use to another, such as turning office space into residential units or transforming a warehouse into a creative hub, requires specific funding. Conversion finance caters to these projects, ensuring smooth transitions and optimised financial support.
Development Finance
For those focused on unlocking the potential of land by obtaining planning permission for new developments, land development finance provides the necessary capital. It covers the costs associated with obtaining approvals, infrastructure development and preparing the land for construction.
Joint Venture
A joint venture (JV) is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing property, residential or refurbishment property development projects. This means the project risks are shared amongst the parties as well as the associated profits.
Key Components of a Development Finance Loan
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Loan-to-Gross Development Value (GDV)
Gross development value is the estimated value that a property or new development would warrant on the open market if it were to be sold in the current economic climate.
A key metric for development finance is what ratio of the GDV a lender is prepared to offer as the maximum loan. At BIG Property Finance we will consider lending up to 60% of the projected GDV, lenders commonly loan 55-60% of GDV, with stretched senior debt lenders offering as much as 80%.
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Interest Rates and Fees
Partly due to the added costs involved with development finance and their specialist loan structure, development finance interest rates are often higher than other forms of property finance. Development finance rates are often calculated on a monthly or yearly basis and can sit around or above 1% interest monthly. The projected value of your project upon completion plays a role in determining the interest rate. Higher GDV projects may qualify for lower rates.
Development Finance is often on shorter terms. Our financing terms typically range from 4 months to 2 years. To account for unforeseen delays, we always provide a minimum extension of 3 months beyond the projected cash flow period.
With development finance there are a number of additional charges that a borrower should be aware of before going ahead with a loan.
Arrangement Fee: Charged by the lender for setting up the development finance or administratively arranging the loan. Typically 1-2% of the loan amount.
Valuation Fee: Covers the cost of a professional surveyor or valuer assessing the property’s value and condition. Cost can vary, but may range from £1,000 to £2,000.
Legal Fees: Involves hiring a solicitor to handle legal aspects of the loan and property transaction. Cost varies and includes both your solicitor’s fees and the lender’s legal fees.
Surveyor’s Fee: Needed to estimate the Gross Development Value (GDV) of your project. Could cost around £1,000 to £2,000.
Exit Fee: Charged by some lenders upon repaying the loan, usually 1-2% of the loan amount or GDV. Cost varies based on whether it’s against the loan amount or GDV.
Professional Fees: Additional professionals may be required, such as architects, quantity surveyors, and project managers. Cost will vary depending on the specific professionals needed and the complexity of the project.
Tips for Securing Development Finance
Building a Strong Track Record:
Prepare a portfolio or summary of your previous successful projects – be ready to provide information on the location, budget and profit of your previous ventures that will help support your competence and credibility.
Preparing Comprehensive Documentation:
Detailed plans and realistic financial projections – Lenders will require a breakdown of costs and schedule of works for your project, providing a clear plan of the materials required and quotes for labour.
Choosing the Right Lender:
Factors to consider when selecting a financing partner – What costs and fees can you expect, how long is the average timescale for funding, what client reviews and testimonials are available, what are the ongoing requirements for project monitoring and further drawdowns, potential costs for project delays and going over term.
Understanding Loan Term:
It is very important you have a clear understanding of the loan conditions and terms you have committed to. Are there any hidden costs or ongoing fees for you to be aware of? The assistance of a finance broker can be very useful when researching and obtaining your loan agreement, as they can talk you through any jargon and draw your attention to important criteria.
Conclusion
In conclusion, development finance plays a key role in residential property projects, from funding acquisitions, supporting planning applications and facilitating construction. Future developers and investors are encouraged to conduct thorough research and seek professional advice when reviewing their options for financing a project, as there are several lending facilities that may support their needs, with differing terms and criteria.
At BIG we want to provide all our clients with a positive experience and quality service. Therefore, we like to work with investors and experienced individuals who fully understand the risks and responsibilities of obtaining development finance. We are always happy to provide further information – contact us today on 121 348 7830 or at info@bigpropertyfinance.co.uk
