Development Finance Explained
Welcome to our guide to development finance where we will provide an overview of what a development finance facility is, the different Development Finance options available, an overview of the process, the types of lenders involved and things to consider.
What is a Property Development Loan?
A property development loan is normally made up of two distinct part, a short term bridging loan facility which is used to acquire land or buildings with the intention to redevelop them. The second part is the development finance, which works in one of two ways, either:
- Payments in advance, the lender will agree various phases of the development which will be approved by the monitoring surveyor appointed by the lender, and once the milestones are agreed, then the appropriate payments will be released. These types of facility are more typical for medium to large development facilities above £500k.
- Payments in arrears, typically used for smaller developments, payments are made once the work is completed, and can be used for small office-to-resi schemes as well as commercial to residential conversions and small new build developments.
Development Finance Uses
- Development Finance is normally used for properties which have some levels of development work to be carried out, these can be purchased via auction, or via agents as normal.
- It is also possible to use Bridging Finance for properties which have development potential, a bridging loan can be used to secure the property whilst the planning consent is secured. Once the planning consent has been secured then the property can then be transferred onto a development finance facility.
- Development Finance facilities tend to be relevant to properties which are larger and have significant work to be carried out, such as building new units, adding on stories to a building, or completely renovating an existing building.
- Property conversions – converting a property either from an office, or industrial unit to a residential property can be a highly lucrative strategy. A development finance loan facility can be used to acquire a property whilst change of use is secured, or to commence works on the property.
- Meeting tight transaction deadlines – a development loan can be used to meet tight transaction deadlines, as bridging loans provide a fast and efficient means of transacting.
Development Finance Costs
Development finance facilities are generally bespoke funding arrangements which are underwritten by lenders on a case by case basis. Development Finance has become increasingly competitive, with rates previously being 12%+ fees as standard. There has been some movement on that with a number of new lenders entering the marketplace, with lenders now offering rates from around 6-8%+ fees.
In addition to the interest rate, there are a number of other fees which need to be considered, these include:
- solicitors fees – fees to acquire and to sell the underlying units
- surveyors fees – there is normally a fee for the valuation of the property and then the ongoing monitoring of the build
- agents fees – when the developer is seeking to exit the agents will charge fees
- broker fees – any broker fees for either the land or the funding facility
Development Finance Terms
Development finance facilities are generally short term facilities with terms normally ranging from 6-18 months, although longer terms are available upon request.
These types of facilities are commonly used where properties are being converted from office to residential, or where an HMO licence is being secured, and then the borrower will move onto a HMO mortgage.
Why use a Development Finance Loan?
A development finance loan can provide a means of building or refurbishing a property which otherwise may not be possible without debt.
How long do development loans take to draw down?
A development loan can draw down in as little as 48 hours, with most lenders expecting transactions to close within 28 days. However, this can be longer if the property is complicated and the legal teams involved are not proactive. The fastest development lenders tend to use “dual-rep” solicitors, meaning that the same solicitors firm represents both the borrower and the lender. In some circumstances this can speed the transaction up.
What’s the Maximum Loan To Value “LTV” for Development Finance
Development Finance is available from a variety of different lenders, terms for the purchase of the land vary, with up to 70/75% LTV available on the purchase of the land, most lenders offer 65% of purchase price.
LTGDV – Loan To Gross Development Value
The LTGDV calculation is unique to development funding facilities, and is a calculation based upon the maximum amount of funding which is available during the development facility against the end value of the property. Maximum LTGDV’s vary depending on lenders, but 65-70% LTGDV tends to be the maximum available, without using addition equity investment or mezzanine finance.
LTC – Loan To Cost
The Loan To Cost is another calculation which is specific for Development Finance Facilities, most lenders will want to see a maximum Loan To Cost of 90%, this means that the developer is contributing 10% of the total costs of the transaction. Some lenders will provide top up’s to this, however these facilities will normally be more expensive.
Commercial Mortgages Broker specialise in Development Finance, offering a wide variety of development finance facilities including development finance for new build schemes, office-to-residential conversions, commercial-to-residential conversions and much more. If you have any questions regarding you development finance requirements get in touch with our team today!