What is development finance?

Development finance is utilised by property companies and developers for various purposes such as land acquisition, initiating development projects, and renovating or converting existing properties. Funds are provided upfront as a short-term loan for land purchase, with subsequent payments made in stages for construction. The calculation of loans takes into consideration various factors, including the projected value of the property upon completion, the type of project, the experience of the developer, the level of build cost, and the equity involved.

The release of each payment at every stage may require approval from an impartial surveyor, who represents the funder. Their role is to verify that the work is being carried out to a commendable standard and that the site holds enough value to proceed to the next stage.

Having a strategic mindset is crucial when considering development finance. This approach can enhance the financial status of your project, demonstrate the impact of each product choice, and establish the structure of your case.

How much does it cost?

The main fees of development finance to consider include:

  • Interest charges, typically at 6.5%-8% for experienced developers and 8.5%-12% for limited experience
  • Lender arrangement fees
  • Broker fees, typically 1% of the total loan
  • Lender exit fees
  • Surveyor valuation fees
  • Legal fees
  • Drawdown fees

What can it be used for?

Property development finance can be utilised for various purposes, including new build construction, conversion, or refurbishment. It encompasses a wide range of options:

  • Single or multi-unit residential
  • Multiphase residential
  • Commercial-to-residential conversion
  • Houses of Multiple Occupancy (HMOs)
  • Mixed-use residential/commercial

What terms can I expect?

Development finance tends to be short-term, with loan terms ranging from 12 to 36 months typically.

people working on building site

How much can I borrow?

Every property development has the potential to receive funding, but lenders have their own unique criteria for determining borrowing limits. Four key metrics determine the size of the loan:

  • The value of the site with planning or the value of the property before refurbishment
  • The build costs
  • The Gross Development Value (GDV), e.g. the forecast revenue or sale that is anticipated from the completed development scheme
  • Minimum borrower equity

The percentage of the Gross Development Value (or GDV) typically falls within the range of 55% to 65%, although it is possible to borrow more based on individual circumstances.

Each deal is carefully evaluated and structured to ensure that there is sufficient funding available to successfully complete the construction.

Fes and interest charged by the lender depend on:

  • The borrowed amount
  • The percentage borrowed against the current value and build costs combined
  • The term of the loan

What if a loan needs to be extended?

Occasionally, developers may encounter delays during the build process, and sales may take longer than initially anticipated. Considering multiple exit alternatives is a wise approach to address these scenarios. If a sale is slow, refinancing options can serve as alternative plans to consider.

How do I know if I’m eligible?

There is a wide range of lenders available, each offering different services. There are funding options available for various needs, including specialised or complex projects, first-time developers, and applicants without a deposit. However, in the perspective of the lender, the primary concern is always whether developers can generate a profit and if they are financially stable enough to repay the loan. Considering this, nearly any property developer is eligible to apply for financing.

The essential documents

Never underestimate the criticality of thoroughly packaging an application. It is a crucial step that should not be taken lightly. The way you present yourself is vital. This is important for a quick evaluation and, most importantly, a favourable result! Minimising delays, ensuring site security, or commencing the project. Preparation is essential. Here are a few of the necessary documents:

  • Details of planning permission and any drawings
  • Details of any planning restrictions
  • A full breakdown of costs
  • CV and details of development experience (this can include experiences of others such as a project manager, or if specialist skills are being employed)
  • Schedule of works (broken down in stages)
  • Details of the team involved (e.g. Architects, Contractors)
  • Asset liability, income, and expenditure summary
  • Details of your proposed exit strategy
  • Proof of ID, residence, and deposit
construction plans on table

Can I apply for development finance without any experience?

Lenders value experience. They value developers who begin with small projects and gradually expand their skills with each new endeavour.

Case relevance is crucial, but there are niche lenders who are willing to collaborate with first-time developers. The main lenders typically prioritise individuals with personal experience, but they may also take into account the experience of others during the onboarding process.

In addition, if you have experience working on similar projects in the past, such as in a project management role, this could also make you eligible. It’s important to acknowledge the skills you may be lacking and seek assistance from others. This will enhance your argument and assist you in expanding into more ambitious endeavours.

Do I need planning permission to get development finance?

For the most part, this is true. However, it is not mandatory. An Agreement In Principle (AIP) is not typically provided before planning permission is granted. It’s generally advisable to wait until you have obtained planning permission before submitting your application. If you do not currently have permission, you have the option to consider ‘planning gain finance’ in the meantime.

Does adverse credit affect my chances of securing finance?

In short, yes. However, there are specialised lenders who are willing to take into account a person’s bad credit history, including payment defaults, CCJs, and even bankruptcies.

How is a loan structured?

The main components of development finance are land cost, build cost, and equity. The broker’s goal is to customise the investment options to ensure low initial investment and high potential profits. The lenders will require a detailed and concise breakdown of the structure in order to assess the potential risks and returns. It is worth noting that lenders do not always insist on large deposits, although it is common for them to require at least 10% of the total costs. However, it is also possible to obtain 100% development finance solely for the construction, which presents an opportunity for lucrative returns.

Why do developers choose brokers?

An experienced broker helps developers optimise their project’s investment. There are numerous benefits that extend beyond just processing an application, including:

  • Bespoke support
    Customising finance to meet the unique needs of the development project
  • Mitigating risk
    Using best practices when working with lenders and employing structured case management from the beginning can significantly expedite processes during crucial stages of construction.
  • Expertise
    For those who are new to the world of development, dealing directly with lenders can be quite intimidating. Today’s lenders meticulously scrutinise every detail. Brokers have a deep understanding of the potential challenges and can expertly navigate you through the complex process, leveraging their extensive knowledge to bring your project to fruition.
  • Broker-Lender relationships
    Working with a well-connected broker who can effectively navigate the market significantly enhances the chances of a successful application. Brokers are skilled at identifying the best deals through their extensive research on lender panels. They also excel at facilitating the smooth flow of information as intermediaries. They have a deep understanding of each lender’s criteria, knowing them inside and out. They are well-versed in how these lenders operate and, most importantly, they have the expertise to determine what will be effective when presenting a case and what won’t.
  • Cost control
    Using a broker can help reduce the cost and time required for researching development funding. Their expertise can bring attention to the most competitive pricing, ultimately aiding in the growth of developer portfolios. Additionally, it can assist in managing tight profit margins on developments and prevent any unforeseen surprises, particularly for those who are less experienced.

What are the different types of finance?

As a property developer or investor, you have access to a variety of loan types.

In simple terms, development finance is used to purchase land or buildings that need to be developed. As your strategy progresses and you encounter various complexities, you may want to explore the option of combining different choices to support it. Some examples of these could be:

  • Bridging Finance to cover a temporary gap in funding, allowing you to proceed with your next project while waiting for a property to be sold.
  • Development exit for paying off outstanding finance after project completion
  • A loan designed specifically for properties that require updates, renovations, expansions, or conversions.
  • A refurbishment loan is designed specifically for properties that require updates, improvements, or modifications, such as modernisation, reconfiguration, extension, or conversion.
  • Commercial mortgages are commonly used for acquiring, refinancing, or redeveloping commercial properties.
  • HMO mortgages are designed for landlords who wish to rent out their property to multiple tenants from different households. These loans cater specifically to the needs of landlords who want to accommodate more than three tenants.

It is important to have a clear understanding of the significant distinctions in interest rates, fees, and usage when developing your strategy.

What lender should I choose?

Not many property developers can rely on the same lender repeatedly to achieve their long-term goals. Each project and case is unique and requires customisation to accommodate the wide range of products available in the market. However, numerous developers lack awareness of the extensive range of options at their disposal.

Having a thorough grasp of the available funding opportunities, whether they are big or small, is crucial for securing the right finance. Brokers are valuable in finding the most competitive pricing, which can be a significant advantage when dealing with tight profit margins. They have a strong understanding of deal structuring and are able to tailor it to fit the specific needs of a developer’s project.

What is the best exit strategy?

Before obtaining any financing, it is important to establish an exit plan for the conclusion of the term. This will provide reassurance to lenders that there will be sufficient equity available through various means such as property sale, refinancing, securing a commercial mortgage, or making a lump sum payment to repay the loan. If selling proves to be challenging, there are alternative refinancing options that can be considered.

Development exit finance provides a convenient short-term solution in case additional time is required. Consideration should be given at the beginning of the project to the ease of selling the property when designing an exit strategy.

How much time should be allocated for any potential delays? Could you please provide an estimate for the duration of the development process? Considering social and economic conditions, and drawing on past development experiences when planning exit strategies. Understanding the true duration of each phase is crucial.

How is the loan paid?

During a build, managing cash flows can be challenging for both the borrower and lender due to timing irregularities and phased working.

When your case is properly structured, the lender retains interest at each stage of the drawdown. By eliminating the requirement for monthly payments, any accrued interest can be paid off once the development is completed. And what was the outcome? An unwavering sense of assurance for everyone involved that the agreed upon financial objectives are still being met.

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As a whole-of-market mortgage broker, we have access to a wide range of lenders, as a result, we can offer the best mortgage solution for you and your needs.

To discuss your lending requirements, speak to one of our experienced brokers today on 0800 195 6345, or email us at info@dolphinfinancialltd.co.uk, or fill out our contact form here.

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