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What is real estate or property development finance?
This is financing granted for the development or refurbishment of residential, commercial or mixed use properties. These can be single unit or multiple unit projects.
Development finance is often granted to experienced and sometimes new builders and developers so that they can raise the capital to turn their building ideas into a commercial reality. Specialist development finance lenders may take the future value of the property – also known as gross developed value (GDV) into consideration when agreeing to a loan, hence the lending may be close to 100% of the buy and build cost. However, it depends on the lender’s policy.
How does development finance work?
Unlike a traditional mortgage lender that will consider the value of the property, a development finance lender will most likely take the value of the completed property project into account to get the loan to value (LTV).
Here’s how the process works:
- You submit an application including how much you paid for the site/ property, your development or refurbishment costs, professional fees and build timescales
- You will be offered some indicative terms from a lender based on this information and supporting evidence
- Credit searches will be run on your existing finances, experiences and the development location
- Once the loan has been approved there will be ongoing monitoring of your project
Who uses development finance?
It is often used by builders and developers planning extensive projects and ground-up developments.
For example, if approved, development finance could be used to cover both land purchase and building costs. A lender might finance 50% of a property purchase and 70% of the build meaning the developer would fund a much smaller amount up-front which frees up cash for unexpected expenses or other projects.
What paperwork do I need to produce for development finance?
Because of the nature of this type of loan there is a large amount of paperwork required in support of an application because the lender has to take into account the future value and saleability of the project once it is completed and the short-term loan is repaid. Hence, extensive use of Chartered surveyors and property valuers is made, some lender’s have these professionals inhouse.
Documents and information required
- Your build or renovation costs
- Timescale for the development
- CV of experience, of both developer and main contractor
- Details of professionals involved with your project
- Copy of planning permission
- Building regulations
- Details of any Section 106s or any planning restriction if applicable
- Site acquisition costs
- Gross developed value estimates.
Pros of development finance
- Allows you to raise capital
- Quick access to funds which could be made available within a month, although it can be longer.
- It is a short term loan that means you won’t be tied down with a loan over a long period of time
- Can be used to cover the cost of contractors and materials
Cons of development finance
- You have to provide comprehensive paperwork
- There will be fixed expenses to take into account such as arrangement and exit fees which are likely to be higher than on a commercial mortgage
- Your interest rate will be decided during negotiations between you and your lender
Is a development finance loan the right choice for my business?
Asking yourself a few simple questions will help you decide.
Do I want a short term loan to help me through my development project?
Am I confident I’ll be able to repay the loan once the project is finished?
Can I provide all of the paperwork needed to access the development loan?
If you can comfortably answer these questions positively, then a development loan might be what you need to support you through your project. If not, and the project is more close to a refurbishment then a Bridge Loan might be more suitable.
We at Everest Financial Services offer access to the most comprehensive list of development finance lenders and the most competitive interest rates in the market.