Development Finance

Development finance is mostly used for ground-up developments, large refurbishments projects or conversions from a single property to a house of multiple occupancy (HMO). Development finance is a type of loan for residential, commercial or mixed-use property development. They are typically offered for a term lasting between 9 to 24 months, and the development loans are then released to you in tranches, at different stages, throughout the duration of the development project.

As experts in the specialist property finance sector, we have a long history of working with development finance banks and specialist lenders. No matter whether you’re an experienced or first-time developer, our commitment to you remains the same – we will secure you a market-leading solution to suit your needs, on time, on budget and at speed. 

Partnering with 177 Structured Finance gives you access to a vast array of options – Our panel also includes challenger banks, individual funders, and private family offices. From single-home builds to sites with hundreds of units, we’re here to structure the very best deal available. Senior, stretch senior, JV, equity, mezzanine, or a mixed facility, with the right information provided, we can provide heads of terms within 24 hours.

To discuss your specialist finance needs, call us on 0203 871 5901 or submit our form.

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Frequently Asked Question – Property Development Finance Explained.

Property Development Finance is the term given to a loan, for the purpose of refurbishing an existing building (and/or changing its current use) or developing from the ground up.

The loan is in two parts:

  • Land loan: This is for the purchase of the security i.e. the land or the building
  • Building Loan: This is to cover the cost of the build or refurbishment.

The Building Loan element will be paid in arrears, in several tranches following a site inspection by the lenders recommended monitoring surveyor. 

They will check the quality and progress of the work, ensuring it meets the statutory planning consent and building regulation conditions, check costs are to the budgeted facility and agree a sum for further drawdown.

Note: Some lenders will offer the funds day one and others may release the funds in stages depending on the size of the loan

New build: Housing and flats.

Conversions: Commercial use to residential units (under planning consent or Permitted Development Rights), or from large residential units to smaller residential units.

Heavy refurbishments: Where work is of a structural nature and generally requires planning consent/building regulations and the construction element of the facility is sizeable and is drawn in stages.

Light refurbishments: This is where no structural changes will be mad to the property, just cosmetic changes i.e. new bathrooms, kitchens, decorations etc.

Lenders could lend up to 90% of the costs. But they will also look at the end value of the development, which is known as GDV (Gross Development Value). 

Lenders will lend between 65 -75% of the GDV, 100% of the build cost and between 50-75% of the purchase price/current value.

The debt offered may be as followed:

  • Senior Debt: This is where the funds are secured as a 1st charge over the property.
  • Stretched senior debt: This is where the funds are secured as a 1st charge over the property, and an additional amount at a higher rate, which increases the loan amount.
  • Mezzanine debt: This is a 2nd charge at a higher rate to cover any shortfalls in funding.
  • Equity is also available up to 100% LTC (Loan to Cost) although most lenders would want a developer to have at least 10% of their own funds in the deal. In the past we have had clients who have increased the value of the site by securing planning permission at have taken this into account as they have increased the value of the site.
  • JV funding (Joint Venture): This is where an experienced developer needs to fund 100% of the purchase price and the build cost, the funder will usually want a 50/50 split of the profits. This is great for experienced developers who have a potential scheme, but their money may be tied up and don’t want to miss out on an opportunity.

Most lenders will only look to lend to experienced developers, or professionals who have experience in the property sector. However, there are some lenders who will lend to 1st time developers.  If this is your first development the lender will want planning to be in place from the outset and have a detailed understanding of how you will complete the project.

A Property Development Finance lender will appoint a professional firm to carry out the following valuations:

  • GDV (Gross Development Value): A valuation of the of the completed project. Many projects may not be complete for 18 – 24 months, therefore the GDV is based if it were on the market for sale that day.  Whilst the valuer will note and comment on potential movements in the market, no account is taken for any forecast changes, positive or negative.
  • RLV (Residual Land Value): A valuation of the land/property, in its current state (i.e. not constructed) but with the benefit of the current and relevant planning consent.

 

The RLV is calculated backwards from the GDV and the appointed valuer is instructed to assess whether the client’s estimated construction costs and professional fees are sufficient to for the project. Most lenders will also appoint an independent Project Monitoring Surveyor for this purpose.

The individual or company who wish to apply for funding need to provide the following:

Executive Summary: This is a brief overview of the project and the financial requirements.

Information about the Developer and the Team 

  1. A CV/Portfolio of projects that have been carried out showing previous projects have been successfully delivered and loans repaid.
  2. A&L (Asset and Liability) statements of directors/major shareholders. This will be required as lenders will want a personal guarantee.
  3. Confirmation of ‘who’ is looking to borrow. I.e. Limited company, personal name or LLP.
  4. A credit report of the borrowers. Generally, lenders will not want to see any adverse credit, although some lenders may consider.
  5. Evidence of own funds being used.
  6. Proof of identity and Proof of address (I.e. Passports/Utility Bill).
  7. One of the most important elements is the developers professional team including Architect, QS, Structural Engineers, Contractors, Selling Agents, Lawyer. 

The details they are looking for are as follows:

  • Company Name
  • Company Website
  • Contact Details
  • Link to the website (highlighting the relevant experience)

The lender providing the funding will also need the following Information about the Project:

  1. The most important document is called the development appraisal. This is where estimated GDV and construction costs/professional fees are broken down backed up with evidence from estate agents for the sales and the build cost broken down. This will be provided by the developer as this breaks down all the costs.
  2. The lender is looking for a return on cost and it should be at least 20%. If the profit margin is too low it will put doubt in the mind of a lender, because if there are over runs due to delays, or the material and labour costs increase, it will reduce the overall profitability of the development.
  3. Build and sales programme and cash flow detailing periods for pre-construction, construction and sales. This will be provided by the developer as this confirms when each payment is required and at what stage of the build.
  4. Marketing and sales plan. This would be arranged local agents looking to market once completed.
  5. Valuation Report if available. This will be required to confirm the current value and the value when completed (GDV)
  6. Site plan and scheme drawings; for design, access, construction matters.
  7. Planning consent (or Permitted Development Rights) to ensure that the consent is valid. All pre-development conditions must be satisfied before a lender will advance any money on the construction element of the loan.
  8. S106/CIIL/Statutory Liabilities details, if applicable.
  9. Party wall agreements; if applicable.

During the loan application the lender will confirm what other documents are required.

Yes, you can amend a planning application. We would suggest you notify the lender at the start of the project to avoid delays or issues.