Property development finance is a type of working capital finance used for large scale property development projects. The nature of development is capital intensive and can be seen as risky. The cost of finance reflects the level of risk associated with the project as assessed by the lender.
How Is Property Development Finance Used?
- Property development finance suits a range of purposes, including: purchasing and/or developing a site for residential, commercial or mixed use
- Acquiring a property for conversion, renovation or heavy refurbishment
- Renovating a property you already own
Finance is usually repaid when the property is sold, or a refinance solution is put in place.
How Does Property Development Finance Work?
Providers assess a project and agree the amount to be loaned. Each project is different and much depends on the experience of the applicant or the design and construction team. The loan term can be from a few months to 3 years or more for very large projects. Advances are drawn down as stage payments at agreed milestones. The lender appoints a surveyor to assess the plans, the costs and ongoing construction progress. Valuation and lending factors include:
- Gross Development Value (GDV) - the open market value of the completed development. Lenders may advance up to 75% of the GDV and perhaps 90% of estimated costs.
- Net Development Value (NDV) - what the fully let development would fetch based on net yield.
- Interest rate –The higher the loan-to-value ratio, the higher the interest rate is likely to be
- Security – Some property development loans are secured against assets or other property. Check with your finance broker for confirmation.
- Planning permission – Not always a pre-requisite if the development is in line with local planning regulations. Planning consent should be in place before applying for development finance.
Advantages Of Property Development Finance
- There are finance packages available to suit a variety of development projects
- Credit history is less important than the capability to deliver the development
- First time developers may be considered when backed up by a good plan and proven team
Disadvantages Of Property Development Finance
- Higher interest rates than standard bank loans
- Drawdowns must be approved by the appointed surveyor before drawing down.
How To Go About Getting Property Development Finance
First, calculate the total end value, costs, profit, cashflow requirements and project duration – then approach a broker or lender. Assessing your proposal will require backup documentation, a lender’s and surveyor’s report and site visits before acceptance. You will need a solicitor experienced in development finance to draft and check contract documentation, and to whom the funds will be released.
Using an experienced broker is a sensible step to sourcing the best deal and preparing your application. Call us on 0345 50 50 888 to arrange a free, confidential consultation with one of our property finance specialists.