A development finance loan is normally a relatively short term loan, with normal terms ranging from 12-36 months depending on the size of the construction product. A development finance facility is a type of mortgage, although has some different characteristics.
The lender will underwrite the development facility and they will be evaluating the following elements:
- Purchase price
- Gross Development Value – the total value of the site once works have been completed
- Build costs – the cost of the developer building the proposed development
The lender will then provide terms based upon a loan to gross development value (LTGDV), this is the maximum amount that they will lend against the future value of the site, most lenders will typically go up to 65%-70% LTGDV, i.e. they will lend a maximum amount of 65% of the total future value.
The lender will also consider a couple of different calculations, which include: LTC – the maximum amount that the lender will advance based upon the costs.
The lender will normally appoint a monitoring surveyor, this is paid for by the developer, the monitoring surveyor will visit the site at various points to make sure that the site is being built to acceptable standards and the construction methods being used are acceptable. The monitoring surveyor will ultimately sign-off on releasing funds to the developer once various stages are achieved.
During the development process the lender will normally agree to release capital at a number of different points in the development cycle, these are in brief:
- Purchase loan used to acquire the site
- Drawdown of capital once groundworks are completed and the site is “out of the ground”
- Then the lender will normally agree a schedule of payments, which may be monthly based upon continued progress, there are a few other milestones which the lender will also consider:
- Weathertight
- First fix
- Second fix
The development finance lender will normally take a “first charge” over the development site, this means that if the terms of the loan are breached that the lender will have the right to enforce their charge, meaning that they can ultimately take ownership of the property, much like a mortgage lender can if you do not keep up repayments.
Why use development finance loan?
A development finance loan can enable a developer to build out a development project reducing the amount of capital which they will need to contribute to the scheme. Most development finance lenders will provide indicative terms relatively quickly, with 24-48 hours.
Development finance rates
Development finance rates have reduced over the past few years, depending on the size of the development facility required it is possible to secure development finance facilities from around 6% per annum.
Development Finance Exit
At the beginning of the development finance project the lender will want to understand what the developers exit strategy is. The lender will review the application thoroughly, and have valuations carried out in advance of them lending the funds to the developer. The developer has two real options:
- Sell the units.
- Refinance the units and retain them.
Types of Development Finance Loans
There are a couple of different types of development finance loans, these include:
- New build development finance
- Permitted development development finance
