What is Development Finance?

Types of projects needing development finance

 

Residential Property Development

  • One house
  • A number of houses
  • A block of flats/apartments
  • Conversion of an office block into residential (via permitted development rights)

Self-build homes (for private use)

  • Single house/premises for the purpose of living in the property

Commercial property development

  • Shops
  • Salons
  • Restaurants
  • A row of commercial units (mixed office and retail)
  • Retail with flats (mixed use residential & commercial)

Property renovation or refurbishment

  • Offices
  • Commercial spaces
  • Houses both for investment and owner occupier use
  • Apartments/Flats

Property Conversion

  • Barns (into homes)
  • Churches (into offices or homes)
  • Offices into residential
  • Structural changes to a property that require planning permissions

Terminology

It is important to fully understand the project at the outset and use the right terminology to obtain the best solution for the client.

The finance options available to you are dependent on the scale of the work required:

  • Light redevelopment/refurbishment loan:for non-structural work to the property, which doesn’t require planning permission or have to comply with building regulations, including relatively unobtrusive, decorative and upgrading bathrooms and kitchens and replacing floor-coverings. Provided the realistic timescales are relatively short then bridging finance should be suitable.
  • Heavy refurbishment loan:for major structural changes, including building on an extension and altering internal supporting walls, it is important to know the cost of the project in % terms against the value of the property. Provided that the % is not too high then bridging finance for longer than the usual 12 months may be suitable. As always with bridging finance it is necessary to make sure that there is enough time with the bridging term to conclude any project and exit the bridging finance on time
  • Ground-up development:a major new-build project involving complete building plans that must be approved, and a team of architect, builders and tradespeople working together, requires more complex development finance with stage releases at given points throughout the project.

Lenders

Connect have a broad panel of lenders that consider development finance, ranging from the High Street Banks e.g. RBS/Nat West to the Challenger Banks e.g. Aldermore, Paragon plus bridging lenders that have diversified into development finance e.g. Affirmative or Roma Finance.

For the larger, more complex development projects we have a number of relationships with specific development lenders who are “off panel”, please speak to the team about these where necessary.

A development loan from a bridging lender or specialist lender can often be arranged much more quickly than a development loan from a traditional bank or building society however it will usually come at a higher cost.

Put simply, development finance is often part of an alternative lender’s core business offering, as opposed to simply an add-on to a mass of other financial products. Certain types of development finance, such as self-build, can only be provided by a lender that is authorised and regulated by the Financial Conduct Authority.

The ideal information pack

  • Development Appraisal (cost breakdown)
  • A completed, asset & liability income, expenditure form (ALIE)
  • Borrowers net assets and liabilities
  • Who will be carrying out the build
  • Evidence to support the GDV
  • Developers borrowing track record
  • Developers track record of similar projects with examples of completed projects
  • Location /address
  • Planning permissions
  • What is being developed i.ee number/type of houses or commercial units etc
  • Term required
  • Bank statements
  • A viable exit strategy, which must fit within the term of the loan (e.g. refinance and/or sales)
  • For less experienced developers the details of the project team behind them

Profitability

All lenders will require the project to be profitable with enough contingencies within the costs before agreeing to fund the project, generally speaking lenders look for a minimum of 20% profit.

Credit to ‘Affirmative Finance’ for their Development Profit Calculator.

Drawdowns

Most lenders will normally require that its loan-to-value (LTV) ratio will not be above a certain percentage – e.g. 70%. The LTV ratio is the amount of debt secured against a property, divided by the value of the property at a particular point in time, multiplied by 100 (debt/value x 100).

For example, if your client takes out £250,000 of development finance to fund 100% of a self-build project, the lender will break the process down so that your client receives the funds in several stages – perhaps five stages of £50,000.

Before each stage of the finance is released to your client, the lender will normally arrange for a surveyor to re-inspect the progress of the project. The offer letter should state this clearly and refer to the cost of the re-inspections.

Receiving finance in stages gives both your client and the lender more security. If the client were given all the funds at once but there was a delay with the project, your client would still have to pay the interest on the entire loan. Instead, they should only pay interest on the monies actually drawn down. As the lender is effectively funding the project in arrears, the developer will need to be in a position to leverage credit terms or to have cash to operate as a float.

Repayment

Development finance is a flexible borrowing option, so most lenders offer between 12 and 30 month repayment terms, and normally there is no minimum term.

If you are building more than one unit (e.g. five houses), discuss with your lender – before entering into the contract – how your client will repay the loan in various stages (known as part redemptions). This is important, as it is unlikely that you would refinance and/or sell all five houses on the same day, so you will need to make sure that the lender will work with you to release single houses from its security when the time comes.

Most lenders will want to receive a certain amount of money from each sale/refinance to make sure that its loan to value ratio remains at an acceptable level.

There are also development exit products that enable the development finance to be repaid by refinance to a cheaper product, allowing more time to sell the properties,

Fees & Charges

Overall cost, overall cost and overall cost. This cannot be emphasised enough because it is not all about headline rate.

Most lenders charge a monthly rate, which can range from 0.75% to 2%. It is normal for there to be an arrangement fee of 1% to 2%. There can also be an exit fee – this can vary as some lenders may charge an exit fee based on the loan amount, but others may charge an amount based on the percentage of the gross development value.

Therefore, a transaction at 1.25% per month, with an exit fee of 1.25% of the total loan, may in fact be cheaper than a transaction at 0.75% per month, with an exit fee of 1.50% of the gross development value.

As the finance is released in stages, interest should only be charged on monies drawn. but also make sure your client is aware of any costs associated with the stage releases.

Typical Terms

Development Finance 
Suitable for: Experienced developers with planning permission
LTGDV: Up to 75% and can fund up to 100% of the build costs
Loan amounts: From £250,000 to £100,000,000
Rates: From 5.5% per annum
Terms: Up to 36 months

Joint Ventures/Mezzanine Finance

Most lenders are looking for experienced developers with a strong background however, for the inexperienced developer, a joint venture (JV) may be a solution for their early projects. They will have to forgo some of the profit however it will gain them the experience for future developments. GoDevelop are one such lender.

With some larger, more complex projects there is the need for mezzanine finance to enable the borrower to have the funds required to fulfil the project. Mezzanine finance is more expensive as it is a second charge behind the main development finance lender and rates typically vary from 1.5% -2% per month.

In these cases, or if you are new to broking a development finance deal, it may well be worth considering using Connect Bespoke and their specialist knowledge in development finance.

Connect Bespoke

Most lenders are looking for experienced developers with a strong background however, for the inexperienced developer, a joint venture (JV) may be a solution for their early projects. They will have to forgo some of the profit however it will gain them the experience for future developments. GoDevelop are one such lender.

With some larger, more complex projects there is the need for mezzanine finance to enable the borrower to have the funds required to fulfil the project. Mezzanine finance is more expensive as it is a second charge behind the main development finance lender and rates typically vary from 1.5% -2% per month.

In these cases, or if you are new to broking a development finance deal, it may well be worth considering using Connect Bespoke and their specialist knowledge in development finance.