There are so many factors to consider when arranging property development finance and therefore it is best to source the options of development finance by using a whole of market broker with considerable experience in the area of development finance and who has good relationships with the lenders. By doing this you will get the best development finance available for the circumstances that you are in at any one given time. The experienced developer will understand the value that a good broker will add when considering all the development finance options available.
How big is your property development project?
Finance options available depend upon the scale required for the project. Light refurbishment loan: perform relatively unobtrusive decorative and non-structural work on the property. The best way to finance the renovation would be using bridging funds. Heavy renovation Loans are available for substantial structural changes, such as alterations and extension of existing internal support walls, where the overall project costs more than 15% of the value of the house.
Costs of development finance
In contrast to the normal development financing rates, these loans often have complex costs. The most expensive expenses can be split into two parts: interest and fees. The fees are normally 1-2% arrangement fees, which will include a broker fees, at drawdown for property development finance and some also have exit fees of 1-2%. Interest rates vary depending on the market conditions and also the risks associated to the project such as gross development value GDV and loan to cost LTC. There are also other costs associated with development finance such as valuation fees, legal fees and monitoring surveyor costs. These latter costs are normally paid upfront, although some of the monitoring surveyor costs are drawdown fees which are paid at each monthly building costs valuation.
Property Finance Deals
Bridging loans to secure commercial property need planning permission to split ownership and renovation before refinancing onto development loans and experienced developers will use this strategy often. It is the same if you use a bridging loan to complete a land purchase to go through the planning process before refinancing onto a development finance loan. Where possible the original bridging loan lenders should be sourced where no exit fee is payable. The market in the UK is very mature so experienced property developers use these strategies to increase the asset value, which in turn release equity called "soft equity" which would then be used as the equity requirement when entering into a property development loan.
How does property development finance work?
Property development finance is one of the most complex forms of commercial mortgage available. Firstly lets consider the three main financial metrics that most lenders use which are loan to gross development value, loan to cost, and return on cost.
The gross development value takes the total amount of net loan(drawdowns) together with the fees and interest and divides them by the end capital value of all the units, otherwise known as gross development value. Loan to cost is the percentage you want to borrow in relation to the total costs of the project which include purchase price of the land value plus related costs, build cost, professional fees, interest/fees. The return on cost is the profit of the project divided by the total costs of the project including interest and normally you want this to be at 20% although many property developers to work off of lower margins.
The loan term normally ranges from 12-36 months depending on the size of the project and the loan amount normally ranges from £1m-£30m. You can obtain smaller and larger loan amount but the majority sit within that range. There are no monthly repayments with interest rolled each month and becomes payable as the units are sold.
The first drawdown is to secure the land purchase and associated costs together with an arrangement fee and then there are monthly drawdown for building costs which normally range from 12-24 months and will be validated by the monitoring surveyor. An exit strategy always need to be in place to secure property development finance and a number of months will be built into the facility for the sales period. Each development finance lenders criteria will determine the type of asset they want to lend against some opting for ground up development and some heavy refurbishment.
There are different risks with both ground up development having more risk in the ground whilst heavy refurbishment having potential unknowns in the building fabric. There is not normally further admin fees or non utilisation fees however they can be seen more so on bespoke structured finance funding lines.
Will banks lend to property developers?
The property development finance options have massively increased over the last decade with the traditional high street banks not writing as much development finance and a large selection of specialist lenders controlling the vast majority of the property development finance arena. Development finance has evolved to include not only development loans but also development exit finance which are used when a site is at practical completion and the sales are taking longer than the original facility allows so a refinance into an exit facility has become more popular where sales have slowed. Development finance provides a percentage of the property or land at day one and then monthly drawdowns against the build costs and professional fees. A Property developer will sometimes use bridging loans to acquire property or land where no planning has yet to be obtained before refinancing into a facility for property development loans where the remainder of the development costs will be covered.
Can you get 100% development finance?
There are a number of ways that you can achieve 100% development finance but it is important to note that the higher the leverage, the stricter development finance lenders will be around the key metrics of loan to gross development value gdv, loan to cost and return on cost. A 100% development finance can be achieved in a number of ways using the various options within the capital stack. Firstly you can structure a first charge by way of development finance with additional leverage on a second charge by way of mezzanine finance and then equity, to take it up to 100% funding, from an equity investor who will take a coupon on the capital provided or a share of profits or a combination of both. Another option is that you can obtain 100% development finance loan from one lender source but there are not many lenders in the market, due to the increased risks, so the key metrics are critical in this scenario.
Where can I get funding for property development?
It very much depends on the type and size of the property development and whether it is for residential property or commercial property. The larger facilities are really only ever obtained by experienced developers and like in everywhere in life do not run before you can walk by taking on a project which you really feel comfortable in delivering successfully. The smaller developments, such as a refurbishment on a single residential property with no planning permission requirement, may be by way of bridging finance to acquire the property and then refurbishments costs being covered by the developer.
Once the works are complete you can sell for profit or retain as an investment property using a buy to let mortgage or obtain a residential mortgage and live there yourself. The important point will be how much you need to borrow against the property value but if you have initially bought well there should be equity in the property to do either of the last two options. The bigger development finance loans have many lenders available, where planning permission is in place, covering property finance acquisition and the build development costs. The key of securing the best terms for development finance, for your individual circumstances, will be by using a specialist property development broker, as your appointed representative, to obtain the leverage you require at the best rate and fees possible.
What percentage is development finance?
Development finance can be obtained, in the current market, up to 75% loan to GDV with rates from 7%-12% per annum. There are many variables to consider as every property finance transaction is different and of course the market conditions at the time of borrowing will also have an impact.
How do people finance property development?
Property development can be financed in many different ways and will depend on the size and complexity of the project. If it is a small one residential unit refurb then bridging finance is a consideration, normally providing terms up to 12 months in length. A bridging loan has become a useful tool for developers as it provides so many more options than previously available. Once you have a finished property you can then consider obtaining buy to let mortgages and retain the house as an investment. If it is a more complex new build development of 20 units then development finance will be used but the leverage required will dictate whether you need senior debt and/or mezzanine funding or preferred equity or equity funding.
What is the rate for development finance?
Development finance rates, in the current market, are around 8-10% in the majority of cases but does depend on the amount of leverage required and the experience of the developer.
What can a property developer borrow?
Depending on the circumstances there are many options available to the developer and of course other assets can be used to raise business loans against. As an example a building contractor can raise a business loan against there assets together with personal loans and use this as equity into a property house builder special purpose vehicle. This will also ensure cash flow is kept fluid. There are so many key factors and everyones circumstances are different so it is not just about a one shoe fits all type of situation. Property finance has many options from short term funding by way of a bridging loan to property development finance to longer commercial investment loan terms.