Development Finance Lenders

So: you’re a property developer who has just purchased a promising bit of property and are now poised to start construction for whatever it is you bought it for.

However, upon checking the state of your available finances, you somehow find yourself short. In which case, you ought to consider development finance lenders to help fund your projects.

Consider development finance whether these are for the refurbishment of existing structures, self build projects or even construction from the ground up.

What is Development Finance?

Similar in principle to a bridging loan, development finance is defined as a form of short term finance. It is availed of to fund up to 100 per cent of a structural refurbishment or the full cost of structural development or construction from the ground up.

Most of the time, this type of financial instrument is something that only experienced borrowers such as landlords and property developers who have been in the field for years or companies with a long-standing reputation in the construction industry. However, some new-generation lending agencies have modified options for first-time developers and even individuals undertaking self-build projects.

We should state succinctly at this point that development finance products are not something you can easily ask for at your bank of choice on the high street. As with a bridging loan, these are specialist products offered by development finance lenders who specialise in property development and real estate transactions or selected intermediaries thereof.

Common Situations Calling for Development Finance Products

Most property developers will utilise the services of development finance lenders for the following purposes:

  • The development (planning and construction), partial or complete refurbishment, or conversion of either a residential or commercial structure you intend to sell within twelve to 24 months;
  • Ready funds in the event of participation in an auction. Having enough will allow you to put in a 10 per cent down payment for a winning bid; or
  • Security against uninhabitable or unsuitable property for mortgages or similar financial products.

In the case of the last item, borrowers may be able to get development finance up to 65 to 70 per cent of the property’s value. This amount could go up to 100 per cent of the development costs and other associated expenses, pending structural refurbishment.

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Standard Uses for Development Finance

In practice, there are three acceptable ways to use property development loans: residential, commercial, and ground-up development. In this section, we define each one and how borrowers can use them.

Residential property development

Taken out for home development projects regardless of purpose. This could be for the purchase or construction of single-detached houses or for something more elaborate.

They could be the development of the property into a residential enclave or a block of flats. Development finance, in this case, gives independent or small-scale developers the resources for purchasing the property, building on it, or refurbishing an existing – albeit structurally unsound – building.

Moreover, if one gets a development finance product with a flexible repayment plan, their exit strategy can involve using the proceeds from the sale of the finished or refurbished houses or other completed properties to pay off the loan.

Commercial property development

Development finance, in this context, is taken out for larger pieces of property or more elaborate development projects for commercial complexes. Projects covered by this financial instrument include mixed-use developments, an office block, central business district development and conversion, and retail enclaves.

These loans are used for development, refurbishment, and conversion, and the sum of the loan may be paid off through either the sale or leasing of the finished development.

Ground-up property development

This is for property developers who are literally going tabula rasa on a project. Ground up development finance is what one needs when one is building on a piece of raw land, contemplating a complete overhaul of an existing structure, or even having an existing (often dilapidated) structure torn down in order to build a completely new edifice.

Developers can later bank on the completed structure either by selling it in full or renting out spaces within.

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Projects That May be Covered by a Development Loan

  • New builds on raw, undeveloped land;
  • Partial renovation on residential or commercial spaces;
  • Full refurbishment of residential or commercial property; and
  • Partial builds or extensions to existing structures.

The Benefits of Development Finance

Not every developer has enough monies on hand to ensure the smooth running of a construction or refurbishment project or the immediate payment on property purchased at an auction, but even those who have ready funds can see the benefit of applying for development finance. These include:

Development finance gives developers access to larger funds than that which they have on hand

Property development is a challenging and competitive field. Hence, being able to survive and grow in the industry means being able to take on medium- and large-scale projects. These projects both show developers’ full capabilities for different development projects and will eventually bolster their corporate or industrial portfolio.

Such projects, however, call for a great deal of funding to ensure completion and this a business may not necessarily have ready access to greater amounts. Development finance takes that load off the borrower so that they can focus on the work at hand without worrying about the money.

For individuals, it does not impede nor impose on their personal finances or that of their business

This is true with individual developers or development firms working on a smaller scale. Development finance can be used to fund an entire construction initiative without breaking the bank and wiping out your savings.

Development finance loans may enable developers to take on multiple simultaneous projects

Having ready funding at one’s fingertips allows flexibility to take on a variety of construction jobs all at once. In addition, it gives you security knowing that the development costs can easily be taken care of.

Getting funds from development finance eventually gets you bigger return on investment (ROI) rates

Development finance enables you to earn more by increasing the value of property through the construction of a new developments on raw land, the expansion of existing property, or the total renovation of a home, shop, or office space. Better structures and spaces result in a greater willingness in your clients to pay commensurate rents or fees.

Development Finance is a Two-Step Process

In most cases, development finance funding comes in two parts: a payout for land costs and a second tranche for building.

Land Costs

This is where the borrower is set to secure a site for development and the lender is prevailed upon to give funds that can cover the cost of purchase. Most of the time, this is raw land which is being primed for development, but it may also apply to the purchase of an existing house or corporate/industrial structure that needs refurbishment or conversion.

Development finance lenders usually give a certain percentage to cover the purchase cost, but the amount thereof is dependent on individual lending agencies.

Construction Costs

Used to pay for costs involved in the actual building of the project. However, lenders do not give this to the borrower as a lump sum. Instead, depending on the terms agreed upon between the borrower and lender, the developer may be disbursed a certain amount on a monthly basis. Note that development finance lenders are willing to go as high as 75 per cent of the total build cost, but be sure to check prior to signing off.

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Development Finance Costs

Before you apply for development finance, you need to consider the following things:

  • The maximum amount that you may borrow will be based on your completed project’s estimated Gross Development Value (GDV);
  • The actual figure will be based on 100 per cent of your construction costs. This could go between 50 to 70 per cent of the land cost;
  • The amount of funding is also dependent on the type of building project you’re working on. It could also depend on how much experience you have (and, essentially, how reputable you are) as a property developer. Moreover, the projected costs of your build per stage will matter; and
  • Your lender may assign an Independent Monitoring Surveyor (IMS) to oversee the budget and project timetable. Note that, while the IMS works for your lender, you will need to shoulder the costs of their services.

Also, before signing on with a lender, double-check on how much they charge in terms of a broker fee and how stage payments will be paid out while construction is ongoing.

Lending Criteria for Development Finance Lenders

All lenders who specialise in property development finance will ask for the following information prior to a borrower’s application for a development loan:

  • The size of the property for development;
  • Specific details regarding the development project, including blueprints should these be available; and
  • The amount the developer expects to borrow.

Some lenders, however, will ask for additional details regarding a borrower prior to the approval of the development loan. These will give the lender a better – and more concrete – idea as to the magnitude of the development one seeks to build or refurbish, as well as an idea on how stable and trustworthy a borrower is. These include:

  • The estimated gross development value (GDV) of the property upon completion;
  • The current value of the property for development;
  • The proportion of borrowed monies out of the overall project costs;
  • Corporate information on the borrower and/or the borrower’s company; and
  • Pertinent information regarding the borrower’s finances and credit history.

Here in the UK, lenders may only choose to work with borrowers located within England, Scotland, and Wales. Also, some lending agencies may opt to work only with corporate entities, with proof of being a limited company as the minimum qualification. Lenders may require further information on a case to case basis.

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What Should You Look for in a Development Finance Lender’s Products and Services?

A potential lender will certainly put you under the proverbial microscope, but that doesn’t mean you can’t do the same to them.

Whether you’re working with a trust bank or an independent broker, you need to make sure that the lender you’re borrowing from, or their in-house team for property-related transactions, has a sterling reputation in the field of property development finance.

In which case, you will need to look at the following points:

Extensive experience in property development finance

Check your lender’s track record to see how well they have worked with clients when it comes to development finance. Pay particular attention to any case studies detailing the work they did for these customers.

Likewise, ask if they have a standardised due diligence process to determine what each of their borrowers needs and, in doing so, suggest the right financial instrument for them.

Reputational capital based on relationship building with customers

It says a lot about a company if people are happy to work with them again and again. Consider a company that has long-term relationships with its client base.

Be sure to ask any contacts who have worked with the lending agency about their working experience with them. Also, check if they offer the same level of service and congeniality with large-scale and small-scale customers, repeat clients, and new ones.

Firms that work directly with their clients

Some lending agencies work through a secondary broker. Therefore, finding a firm or a licensed individual who can deal with you directly can save you some serious money.

Also, working directly with your lenders opens the doors to more attractive – and affordable – financing packages. It also gives you quick access whenever you need additional assistance or technical support throughout the process.

Supportive and informative lenders are always a plus

Many developers tend to shy away from property development lenders or a broker who do not disclose information whenever asked. The very best firms are those that patiently guide first-time borrowers through the process. For more experienced clients, they offer informed opinions when asked about different aspects of development finance that borrowers may deem necessary to make decisions.

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Reputable Lenders to Consider for Development Finance Products

At The Bridging Loan Company, we numerous options to suit your needs for various property development loans. Our team is made up of experts who have extensive experience in the British real estate sector and are in a position to give you astute advice regarding various loans and property financing solutions.

At present, we have access to over 200 lenders across the United Kingdom who offer various services and financial instruments to suit each client’s specific financing requirements. Our current roster of contacts includes:

  • Magnet Capital
  • United Trust Bank
  • Octopus Property
  • West One
  • Shawbrook
  • Castle Trust
  • United Trust
  • Together
  • Affirmative
  • Apex Bridging
  • Funding 365

Interested to know more about what we and our partners can do for you?

Fill in our online enquiry form here with your information so that we can get back to you and we can begin the application process as soon as possible.