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When we talk about development finance, we're talking about a massive range of projects and funding providers. From large-scale commercial developments to residential new builds and individual refurbishments through to rental market renovations.
There are, therefore, lots of different development finance products on the market. The ideal product for you will depend entirely on what work you're planning, what sort of property it is, and how much you need to borrow.
Let's run through the most common products, whom they're suited to, and what costs you can expect to pay.
For further advice about selecting the most appropriate development finance, or applying to the suitable lenders who specialise in your sort of construction project, give us a call!
The Revolution Brokers development finance team is available on 0330 304 3040 or send us an email at email@example.com and let us know when you'd like to talk.
First, let's look at 100% development finance.
Of course, the 100% means that the lender is putting up all of the cash needed to develop the property - and so you'll share the profits with them.
You will each have a 50% profit share in most cases, although that can vary depending on interest charges. It's essential you're clear and satisfied with the profit share agreement before any paperwork is signed since you'll be tied into the joint venture and won't usually be able to revisit this.
Most developers won't make any repayments during the loan term, and the interest will be rolled up with the capital balance and need to be repaid in full.
Therefore, venture finance is an attractive solution for developers with excellent prospects without the cash available to put down as a deposit.
This type of development finance includes, usually, 100% of both the initial purchase costs and the development costs.
This type of development finance is aimed at experienced developers. You'd need an exceptional proposition to borrow 100% of a development budget if you've no track record of successful projects.
Lenders prefer to see either planning permission or at least outline planning permission. Projects without planning are too high-risk for this type of loan.
Profit margins are also crucial, as a funding provider needs to be making a sufficient profit to mitigate the risk they are taking.
Joint venture developments start at projects with a GDV (projected project valuation when complete) of at least £1 million.
If the profit margin is at least 30%, a lender is more likely to consider it.
You'll also very likely be asked for a personal guarantee as an assurance that the provider will recoup the loan even in the worst-case scenario. This guarantee can often be capped at a particular value.
It is possible, but you'll usually need a significant level of security since you're applying for lending with zero deposit.
Most developers in this situation would need to offer other properties as security.
If you can't offer sufficient security, you'd need to provide a profit share.
The primary criteria are that:
In most cases, the property is placed under the ownership of a specific type of limited company called a Special Purpose Vehicle (SPV).
The funding provider owns the company, although you have a guarantee that assures your stake.
The big plus is that you can develop a property without needing a deposit or release other capital to raise the funds you need.
Developers use this option to take on developments faster and thus raise the profits they are making.
Using an SPV in joint control with the lender to manage the ownership of the property also means you lower your legal fees.
Lenders will need to understand what the risk level is and consult their underwriters before they can make an offer.
The critical criteria are:
Usually, you will need the below information:
The best thing you can do is to provide detailed, thorough information that shows the lender that you're a less risky applicant.
That could mean researching local property prices, planning the work carefully, and identifying ways to make the project more appealing from a profitability perspective.
Commercial Development Finance
Our next category is commercial development finance; aimed at businesses and developers looking to construct commercial premises.
Residential projects tend to be less risky, and so you'll need to work with an experienced broker to source competitive lending.
Here are the steps to securing a commercial property development loan:
There isn't any cap, as such, but the lender will consider how much the site is worth, how much the development is going to cost, and how much it will be worth on completion. These figures all help arrive at a maximum lending offer.
In most cases, providers will lend up to 55-65% of the purchase cost, and up to 60-65% of the total GDV - i.e. what the project will be worth once the development has finished.
The monthly interest is typically rolled up into the loan. That means you don't need to make repayments until the development is complete, and will repay the full balance once the property is sold or refinanced.
Revolution Brokers works with a vast network of lenders, providing commercial development finance for any number of property types. These include:
Our next product is mezzanine development finance; this is a bridging loan that covers the difference between the deposit you can put down, and the maximum your lender can offer.
Mezzanine lenders usually take a second charge over the property to secure their lending.
Developers use mezzanine finance to be able to take on large-scale developments and maximise their investment returns, without needing to release capital to raise a larger deposit.
The typical criteria are as below:
Revolution Brokers lenders usually start at loans of £250,000, without any particular limit. Most lenders will offer up to 90% of the project costs, provided all criteria are met.
Costs depend very much on the individual project, and the Revolution team provides bespoke advice and negotiations to every mezzanine funding client.
Interest can be anything from 1% per month and upwards. There are significant risks to offering mezzanine finance, and so the lender will consider the following factors before they make an offer:
It can be - you need to understand that you're borrowing from multiple lenders against the same development project, and each loan will carry interest charges.
Mezzanine finance applicants are personally liable, even if you're applying through a business. As such, if the development falls through or the property doesn't sell, you could be risking personal assets.
If you apply through a company, you will be asked for a personal guarantee as security and a risk-aversion measure.
Regulated Development Finance
Now we'll consider regulated development finance; where you're looking for lending to build or renovate your own residential property.
The regulated part of the product refers to the proportion of the property that is being used as a home; if that is over 40%, it becomes a regulated product.
This type of finance is most relevant when a person buys a plot of land to build a property, or wants to develop a new residence in an existing garden space.
There are lots of reasons you might decide to build your own property - and the benefits of regulated development finance, as well as the critical lending criteria, are below:
No, there's no maximum, but loans start at £50,000. The maximum depends on what the land is worth, and how much the property will be valued at when it's finished.
Most lenders do not require any regular repayments whilst the build is ongoing. Instead, the monthly interest is rolled into the loan.
When you finish the build, the total is repayable - the capital borrowed, plus the interest accrued.
You draw down the funds in stages at critical points in the building project. Usually, you can draw down a proportion of the facility at the beginning - to purchase the land or pay for upfront costs - and then draw down tranches as the project progresses.
Interest rates vary depending on the project and the values involved.
The best way to secure competitive interest rates and attractive terms is to work with an experienced development finance broker who can negotiate with the lender on your behalf.
Some lenders do allow voluntary interest payments, which can bring down the total owed. However, most self-build property owners choose to remortgage at the end of the term on much cheaper rates, when the property is worth significantly more than it cost to build.
These products are similar in that they can borrow the funds needed to build a home. Usually, a self-build mortgage is cheaper. However, this isn't a viable option in many cases, whereas regulated development finance is available.
Scenarios where development finance is more viable include:
Self-build mortgage criteria tend to be stricter, and therefore alternative development finance can allow your construction project to go ahead through a different form of financing.
Residential Development Finance
Our final product is residential development finance. As the name suggests, this sort of loan finances a build of residential property, or the conversion of an existing building.
Residential development finance spans one property build, through to vast projects where thousands of units are planned.
The main criteria for residential development finance include:
If you are developing a property, or several properties, where some spaces will be commercial and some residential, you will find the lending criteria very close to those for general residential development finance.
Some lenders might require pre-sale agreements on commercial units since they are harder to sell than vacant residential properties.
You can borrow from £50,000 as with other types of development finance, with the maximum depending on the costs involved.
The lower the risk and the larger the loan, the lower the interest rates will be. Typical interest charges start at 4.5% per annum.
This type of application can be completed in as little as six weeks, although the standard timescale is a little longer.
You can decide on your exit strategy at the point of application. Still, in nearly all cases, you will either sell the property at a profit or remortgage to pay back the development finance.
If you are selling a property - whether residential or commercial - the lender will need to see market estimates that support your projected profit and sale value.
Another newer option is to look at development exit finance. This product is used to refinance development finance through another short-term product, although with lower interest rates.
This option is ideal where sales are taking longer than expected, or where having a little breathing space will help you achieve a higher sales price.
The mortgage advisors team works with a vast network of development finance lenders. So we can recommend lending providers in nearly every scenario that will be able to consider your development financing application.
This includes private developers, partnerships, domestic and offshore businesses, and international investors.
For more information about the different development finance products; and which might be most suitable for you, give us a call on 0330 304 3040 or send an email to firstname.lastname@example.org.
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The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature. We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.
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