How To Get Development Finance To Purchase And Develop Land Or Property
If you are contemplating getting finance for a property development for the first time in this article we look at some of the areas you need to consider.
You may have previously funded development projects for investment purposes out of your own cash or if you are a first time developer you may have some cash to get things rolling but not enough to take a build through to completion.
Reasons for raising finance might include:
- Finance for purchasing the land/property: In the absence of a significant amount of capital, the largest outlay will often be what you pay to purchase the property or land to be developed.
- Finance for funding planning costs: Often these costs are underestimated. Paying for external consultancy to help your planning application can make all the difference.
- Funding development Costs: Depending on the project some lenders will cover up to 100% of the development costs.
- Paying for selling costs – Selling your completed build is not a cost free exercise. Often this is an after-thought. Marketing your completed development will cost money.
Purchasing Land Or Property
If you have found a property you wish to buy getting funding quickly may be crucial in making your development plans a reality.
Getting A Mortgage
While your first though might be to get a mortgage from a high street lender, a standard mortgage is unlikely to be suitable. A mortgage is typically a long term loan agreement between 5 and 35 years. When buying, developing and selling a property for investment purposes finance will probably not be needed for more than 24 months.
Unmortgageable Properties …
Traditional lenders will not lend on a property that they classify as unmortgageable. This will include land or land with buildings that are not inhabitable. An unmortgageable property also includes buildings where there is no functioning bathroom or kitchen, or if the value of the property is under a set amount, typically £25,000 or where there are any severe structural issues.
Even if you are buying an existing habitable property that could be mortgaged, unless you are planning to live in the property on completion, there are often more suitable forms of finance that you need to consider in getting your development project off the ground.
What Is A Bridging Loan …
A bridging loan is a type of fast finance that is specifically designed for shorter term usage, typically up to 12 months. Bridging loans can provide a temporary cash flow solution or ‘bridge’ before additional longer term finance becomes available.
Fast Finance …
Unlike traditional lenders’ applications, bridging loan lenders’ applications do not usually take weeks or months to process. If you have a good finance broker, it is possible to secure a bridging loan within 7 to 14 working days. The speed and convenience of a bridging loan may help you avoid delays and could ensure that you do not miss out on an attractive opportunity. People buying property at auction often utilize bridging finance as the auction house will expect you to provide funds within 28 days.
Rolled-Up Interest …
Unlike other types of finance from traditional lenders, bridging loan lenders often provide the option to ‘roll-up’ interest on a loan to pay at the end of the term of finance. This may be attractive for property development projects, as the loan can be used solely on the development and not on contributing towards interest repayments.
Bridging Lender Requirements …
Bridging lenders will typically lend up to 70% of the asset value. Most will require this to be bricks and mortar so land value only may not be enough. Lenders are often happy to secure funding on multiple assets to provide the finance you need. If your residential property is part of this security, then the bridging loan will need to be a regulated bridge. The lender in this situation will need to know that in the event that you are not able to pay off the bridging loan at the end of the fixed term, you will be able to afford the monthly interest payments from your income. In this respect an assessment will need to be done on your personal financial circumstances to ensure you meet affordability criteria.
Exit Plan …
A clear exit plan must be in place, in order to secure a bridging loan. An exit plan is the intended method to repay the loan at the end of the term of finance. An example of an exit plan is where a property is sold after the sale of the developed property, or where a mortgage is used to replace the short term finance.
Bridging loans are becoming an increasingly popular method to access the finance required to fund the purchase and development of a property. While short term finance is not as cheap as standard mortgage finance, bridging finance provides developers a useful tool in securing and developing property quickly.
Development finance is funding that can be accessed via a finance broker through specialist banks, some building societies and private lenders. This type of finance is typically made to experienced developers who have a previous track record. There are a handful of lenders who will consider inexperienced or first time developers but usually this is conditional on the borrower working with an experienced builder and project manager. As part of any development loan application process a lender will look at things such as location, planning approval and comparable values of properties in the area.
Development Costs …
It is possible to access a significant amount of finance to put towards property development. Typically, development finance lenders are willing to provide funding up to 65% of gross development value (GDV) although each project will be assessed on its own merits.
Some lenders are prepared to provide up to 100% of construction costs, although this will be on a case by case basis.
Development Exit Finance
Development exit finance is usually used by experienced developers who have physically completed their development and are waiting for it to sell.
Property developers can utilise development exit finance, which could alleviate the financial pressure and potentially increase their cash flow to use on their next project.
Example: An experienced developer wanted to purchase a property, develop it and sell it on for a higher price. The developer secured finance with a lender for a term of 12 months, purchased the property and started development. On completion of the development there were still 5 months remaining in the term of finance. The developer approached another lender and secured development exit finance, which reduced the interest on his finance by 30 base points and saved the developer money for their next project.
Development exit finance is a specialist product and can be sourced through a finance broker.
Joint Venture Partners
If you do not have enough capital to develop the property yourself and you cannot access any funding elsewhere, you could approach a joint venture partner for assistance.
Advantages Of A Joint Venture …
A joint venture is where two or more developers pool their resources to complete a project. Joint ventures are specifically attractive opportunities for inexperienced developers. This is because they can provide inexperienced developers access to property development finance and build their portfolio, which could make it easier for them to secure funding in the future.
The amount funding you can access will vary between joint venture partners. However, it is not uncommon for lenders to provide finance up to 50% of the Gross Development Value; this may include up to 100% of the building costs.
Joint Venture Profit Sharing …
It must be noted that upon completion of the project, lenders who enter into joint ventures with new developers usually require a percentage of the profit. Ultimately the percentage of the profit the developer has to pay will depend on the JV lender.
Mezzanine finance may provide a solution where existing finance has been put in place, but there is a shortfall in funding.
How does Mezzanine Finance Work …
Mezzanine finance sits behind the prime lender and acts as a second charge for the development. The majority of mezzanine loan lenders are prepared to provide up to 20% of the gross development value.
It is commonplace for the breakdown of funding to be:
- Prime lender: 70% of the total cost
- Mezzanine lender: 20% of the total cost
- Developer: 10% of the total cost
Not For Inexperienced Developers …
It should be noted that mezzanine loan lenders are reluctant to grant a mezzanine loan to new or inexperienced property developers. The reason for this being that there is a heightened risk associated with lending to a property developer without experience or a portfolio of successful projects.
Property Finance Brokers
It should be noted that lenders that provide bridging loans, private mortgages, development finance and mezzanine loans are often not accessible to the general public.
Clifton Private Finance
As a specialist property finance broker, we can provide a clear picture of the financial solutions available to you and identify the finance that is suited to your specific circumstances. We have an extensive network of specialist lenders, who can provide the finance you need to fund your development project from start to completion.
If you need funding to finance your development, call us on 0117 959 5094 or complete our callback form.
Case Study: Funding A Property Development
We were approached by a client that had sourced land in Clacton-on-Sea worth £190k and planned to develop four semi-detached houses on it.
Due to some unforeseeable delays, our client had only ten days to complete the purchase. In order to complete the purchase and the development of the houses, our client needed £625k.
It was integral to secure finance as soon as possible, due to the tight deadline. Through our strong links with private banks and specialist lenders, we were able to arrange a bridging loan, with a three month term of finance, to cover the cost of the purchase of the land within seven days.
Following the purchase, we negotiated with the lender to refinance our client’s loan with a development facility. The client used some of his own capital to start the project and bring it to a certain point and the development was funded by the development facility completely thereafter.