As can be seen in the name, Property Development Finance is a type of loan, which is secured against property or land similar to a property mortgage.
Property Development Finance is high interest, short-term and generally used to fund a complete build or a property conversion. Whereas standard mortgages are longer in term and bear lower interest rates.
Once a development is completed the developer may sell the property, get it refinanced/re-bridged, or get a buy to let, commercial or residential mortgage. These are the ways in which Property Development Finance can be paid back.
Most Property Development Finance lenders offer a certain percentage loan on the site to be developed. Usually the site is considered as a deposit for the loan. Property Development Finance is always released in phases in line with a construction schedule.
Lenders face a huge risk during the construction phase of a site and the project is more difficult to liquidate due to delayed or non-payment. That is the reason high interest rates are charged to cover these potential eventualities. This type of loan is a great short-term product but not a viable long-term option.
Property Development Finance is not the cheapest funding available to developers, so many of them only use the funds for up to eighteen months. However, it certainly is a great product for developers to make a quick profit and move onto the next project.
There are various types of Property Development Finance available, such as:
Anyone who wants to develop a site can apply for a Property Development Finance. It may be a single dwelling, a block of flats or a commercial development. Most lenders have a standard criterion where they will only fund a certain percentage of the project. As long as you have the deposit, or your land can be used to bridge the finance gap.
Lenders always prefer to lend to experienced property individuals or corporate property developers.
The cost of Property Development Finance can vary from lender to lender. It usually starts at 4.5%/year to 15.5%/year.
The rate of interest charged by the lender depends on the nature of the project. Lenders’ underwriters will look at the following major factors before lending:
As we have mentioned above, Property Development Finance is not the cheapest option. Apart from interest on the loan the lender may charge other fees such as an arrangement fee which can be from 1-2.5% of the total lend. In addition, some lenders will charge redemption or exit fees which can be 1-2% of the loan.
If you are using a broker to arrange Property Development Finance, brokers will receive commission from lenders, they may also charge an additional fee of 1%-1.75%. This fee can easily be added to the loan if needed.
The level of funding offered by a lender is generally restricted by the value of the security – both the value on day one and the gross development value.
To manage an LTV (Loan to Value) throughout the build period, the loan is usually released in phases at regular intervals. The stage released payments are usually either broken down by monthly releases or against set benchmarks on the project.
Most lenders will allow a drawdown of 70-75% of the overall project cost. It can be a day one value or the purchase price.
The lenders will usually appoint a surveyor to make sure the project is on track and staged payments are managed correctly. The surveyor will also check that the progress and the build quality of the construction is in line with the plans.
Most lenders will lend up to 70% of the GDV (Gross Development Value). Some lenders may charge less but only offer 50-60% LTV (Loan to Value).
In most cases monthly interest is added to Property Development Finance, so there is nothing to pay monthly. However, the interest can be paid monthly if client prefers this option. When executing a development project, a cashflow can be an issue for a developer. So, for that reason most developers opt for paying the whole loan back at the end of a term.
All lenders assess their applicants in their own way. They may have a different way of vetting a client but usually with similar types of questions. They usually ask the following questions:
When you take out Property Development Finance, you are wholly dependent on the lender and will be answerable to them throughout the time of the building project. The site visits need to be arranged to be able to get the next stage payment. You have to be in constant communication with the lender about build updates. It can be time consuming and will demand adding more resources to an already busy and tight schedule.
If you are managing a complicated project, then you may be asked to provide endless amounts of information to further your loan application. If the project is well planned, then all the information should be there in the first place and easily available.
As mentioned before Property Development Finance in not the cheapest loan option. Furthermore, this type of loan attracts interest and fees such as arrangement fees, exit fees and brokers’ fees. All these expenses will eventually eat up some of your profit.
Property developers can make large profits by attaining these loans. They help developers to create large developments. In addition, in some cases, a project can be funded with a small amount or no finance at all.
Large projects can generate huge profits for developers but require a long-term capital outlay and usually profit maturing at the end of the project. This can result in poor cash flow during the build period. Property Development Finance resolves this issue easily by financing the site.