Business Loans for Property Development

Property development finance provides investors with the funds required to undertake significant construction projects, with carefully staged funding that ensures capital exists when needed while minimising costs.

At Clifton Private Finance, we help our clients secure the property development loans needed to see construction through to completion, with options for either an immediate sale-based exit or long-term refinancing.

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The Need for Specialist Property Development Loans

Property development projects, whether construction from scratch, building conversions, or renovations, require significant and stable funding to see through to completion.

With a near limitless number of potential complications, both commercial and residential property development must be able to react with agility, adjusting to a wide range of challenges from unforeseen issues with the land to legal complications in planning.

Budgets determined on spreadsheets may be reliable, but forecasts can never be 100% guaranteed. Property development finance offers that flexibility, designed in stages to limit exposure to risk and reduce unnecessary interest.

Designed as a short-term finance solution, property development loans are exit-based, meaning they avoid impacting cash flow during the project lifetime with regular repayments and can be settled through the final property sale or through refinancing for long-term rental-based property investment.

The Size of Development Finance

Development finance is available for projects between £100,000 and £50 million, suitable for construction and renovation projects for:

• Experienced Property Developers: Development firms with a proven track record of successful projects looking to finance significant building projects.
• Professional Builders: Contractors who have purchased land or properties suitable for development needing financing to cover build costs.
• Property Investors and Landlords: Individuals and companies expanding portfolios through renovations, buy-to-sell, and major conversions.
• First-Time Developers: Those coming to development for their first project with first-hand experience in the construction sector and well-considered plans.

Depending on the project scope, development finance may provide as much as 80% of the funding necessary to see construction through to completion.

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Property Development Loan Ratios - LTV vs. LTC vs. LTGDV

Like traditional property loans, such as mortgages, property development loans are offered based on a percentage of the asset value.    

However, as the property is not yet developed, the standard metric of loan-to-value (LTV) is typically too small to prove meaningful.

In these early stages, only the land has any defined value and that’s likely to be many times smaller than the required funding.

For example, an intention to build a £1 million property on land valued at £250,000 would require a LTV of 400%.

Property development loans, therefore, utilise two different values to base loan ratios on: the cost of development, and the gross developed value (GDV) of the final property. This leads to LTC (loan-to-cost) and LTGDV (loan-to-gross-development-value).

Loan-To-Cost (LTC)

LTC is calculated as a percentage of the planned development budget and represents how much of the development costs need to be covered by the funding.

These development costs may include:

• The initial land purchase
• Legal fees, planning permission, and other regulatory costs
• Stamp duty and other property taxes
• Cost of construction or renovation
• Management costs

A loan based on LTC, therefore, provides a clear understanding of how the expenses are covered, with a portion requiring the developer’s investment capital and the remainder paid by the property development finance.

• An 80% LTC loan against a total development budget of £1,000,000 represents a total loan sum of £800,000, with the first £200,000 of costs covered by the developer’s capital.

LTC is considered by many lenders to be a valuable metric that efficiently identifies lender expectation and risk.

Loan-To-Gross-Development-Value (LTGDV)

LTGDV is the more common ratio to assess the size of property development loans, closer in tone to the familiar LTV used in residential mortgages.

It’s calculated based on an estimate of the final sale value of the completed development and can be extremely helpful in determining how much of the proceeds are used to repay the finance.

• A 60% LTGDV loan on a property forecast to sell at £1,400,000 provides a total sum of £840,000.

Because of the different calculations used to determine LTC and LTGDV, at a glance, LTGDV looks to be a smaller value loan, though the opposite may be true.

Naturally, both LTC and LTGDV are based on estimated figures. To better evaluate risk when determining the loan amount, lenders will often use both LTC and LTGDV before finalising the offer.

Staging: The Power of Property Development Finance

The costs of property development loans are a key consideration for developers and managing interest and fees is a priority. Staging gives both lenders and developers an additional level of control that helps lower interest accumulation while providing targeted capital as and when needed.

It also provides additional flexibility for both parties, with re-evaluation at later stages potentially adding opportunity for access to greater funds.

An example of staging may be as follows:

Stage 1: Initial Agreement

With the project in its planning stages, the developer is looking for a £2 million loan to build a luxury hotel on land valued at £300,000. Legal considerations including planning permission have been preliminarily cleared, and the developer has £400,000 of capital available to invest.

The gross development value of the finished hotel is forecast at £3,250,000. The full development costs including land purchase are estimated for a budget of £2,400,000.

A £2,000,000 development loan represents 61.5% LTGDV, and 83% LTC and is approved due in part to the developer’s confident planning and prior successes.

The capital for the initial stage represents 30% of the full loan: £600,000 is provided to purchase the land and begin construction.

Stage 2: Foundations Complete

The first milestone is reached when the foundations for the hotel have been created. This triggers the second stage of funding, releasing 20% of the loan: £400,000 to continue work.

Stage 3: Structure Complete

Building the structure ran into complications with the workforce and consequently ran over budget. The developer meets with the lender’s surveyor to discuss options and negotiates a larger than planned portion of the loan to be released.

The original agreement for a 15% capital release (£300,000) is raised to 20%: £400,000 is made available, covering continued work.

Stage 4: First Fix

Background negotiations between the hotel’s multiple interested parties have been completed, resulting in a fixed contract for final sale of £3,500,000 pending the addition of a more comprehensive car park and upgrades to intended fittings.

This boost to the building’s final market value improves the developer’s position considerably. Once more, they meet with the lender to consider options.

With the lender’s approval, the loan is renegotiated to add £150,000 (for a total of £2,150,000). Based on the new GDV, this maintains the LTGDV of 61.5%. A capital release of £450,000 is made, leaving £400,000 for the final stage.

Stage 5: Second Fix

The remaining £400,000 is provided at the second fix stage, providing the funds needed to see the project through to successful completion.

Stage 6: Sale and Repayment

Once completed, the hotel is sold for the agreed £3,500,000 and the property development loan balance, including interest, is settled in full.

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Obtaining a Property Development Loan

Securing property development finance requires planning and competence. Lenders exist to help developers who can see the project through to completion and present low levels of risk.

When it comes to your funding application, this means:                                  

Sizeable Deposits and Equity

Development finance is only available to investors and developers who are putting their own capital and assets into the project. With funding available up to 80% LTC or 65% LTGDV, deposits that meet 20% or more of the project costs will be required.

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Experience and Credibility

Lenders are not just providing capital based on the project itself, but are fully engaged in the development team. Prior experience is extremely valuable.

This does not mean that lenders will only provide property development loans to firms who have already completed successful construction projects, but the team’s experience with similar projects is a major factor to successful applications.

Development finance is rarely made available to new ventures made up of management or construction teams with no track record.

Project Proposal

Development projects need to be fully considered, with comprehensive plans in place prior to a funding application. Plans should consider budgets, market viability, and environmental concerns.

Planning and Legal Considerations

Ensuring the correct planning permission has been approved and that all legal challenges have been addressed will greatly improve the chance of loan success.

Exit Strategy

Property development loans are exit-based funding, repaid at the end of the term when the project is completed.

This is usually accomplished through one of two outcomes:

• The development is sold and finance settled with the proceeds.
• The development is kept as an investment to be let out, with the loan repaid through long-term refinancing, such as a corporate mortgage.

Exit strategies need to be clearly defined at the point of application with mid-stage alterations only at the lender’s discretion, potentially incurring additional fees.

Property Development Finance Rates and Fees

As with all finance options, property development loan rates vary based on lender risk appetite. Firms with a strong proposal, proven track record, and larger deposits will command more competitive rates than newer companies approaching their first project.

Terms are aligned with project timelines, with flexible terms that range between 9 and 36 months. Paying off the loan early will limit the interest accrued, though exit fees and early repayment charges may be applied.

Fees may include:

• Arrangement Fee: An arrangement fee is standard for lenders, typically between 1% and 2% of the loan total.
• Exit Fees: Some lenders include exit fees, irrespective of early repayment charges. These are often between 0% and 2% of the facility.
• Valuation Fees: Valuation fees will depend on the project specifics and development scope.
• Legal Costs: Borrowers must cover their own costs, and in some cases, also the lender’s legal fees.
• Monitoring Fees: Lenders may include fees at each drawdown stage to cover the cost of monitoring and evaluation.

Development finance may be structured with either a fixed-rate or a variable interest rate, to suit both lender and developer appetite. Interest is either rolled up (paid at the end), retained (set aside and covered separately), or serviced (paid off monthly). To limit cash flow stress, many developers prefer rolled up and retained interest structures.

At Clifton Private Finance, we work closely with you and the lender to maximise flexibility and keep costs as low as possible, structuring the property development loan to suit your circumstances and project requirements.

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Property Development Loans with Clifton Private Finance

As a whole-of-market business finance broker, Clifton Private Finance is perfectly positioned to get you the high-value property development finance you need to see your development projects to completion.

Our established relationships with specialist property development funding lenders provide you access to the highest levels of funding, with loans from £100,000 to £50 million to make your project a success.

We offer:

• A comprehensive planning and pre-approval process based on your forecast and budget to determine the right level of funding    
• Dedicated finance for both commercial and residential property construction    
• Access to refinance options for long-term property asset retention    
• Support throughout the construction phase including additional flexible funding if required    
• Additional business finance facilities to support cash flow during the build    
• Personalised advice to help you understand and explore all funding options    

For a free consultation, speak to us today.