Property development finance covers a broad spectrum, but in all cases is used to finance the construction or development of a property build or renovation.
Therefore, it works differently from a standard mortgage or loan, with the borrowing released in stages as the build progresses.
Here we've outlined the key information about staged releases and drawdowns, and what to expect from your development finance loan. For more information about whether development finance is right for you, give us a call on 0330 304 3040 or email the Revolution Brokers team on info@revolutionbrokers.co.uk.
How much of my Development Finance Loan is Released Upfront?
Lenders will usually set a maximum on the amount of the loan they're willing to release before the development can begin. In many cases, this is the financing used to purchase the property or land for the development.
Many lenders will offer up to 65% or 70% of the site value, with interest chargeable from the date of the drawdown.
How do Staged Payments Work in Development Finance?
Also known as tranches, development finance is released at fixed stages when a particular milestone is reached, and the work has been signed off.
In most cases, the lender appoints a monitoring surveyor who will verify when the milestone has been reached (for example, completing the foundations or weatherproofing the property).
The monitoring surveyor keeps track of the work as it is completed, and to ensure it is running to schedule.
How Important is Cash Flow Management in Property Development?
Poor cash flow management might be the one most significant reason why developers come unstuck - so it's vital!
Development finance is often released retrospectively, after a stage of the work has been completed. You'll also need to invest the deposit for the balance of the original site purchase cost.
Most developers need to finance works as they go, claiming the funding back at the relevant point. Hence, understanding exactly how the development has progressed, and whether the costs are on budget, is essential.
How Can I Keep Track of my Costs and Build Schedule in a Property Development Project?
To start with, you'll need a highly detailed schedule of works, and a budget setting out the costings for each element of the development.
Lenders will need to see these plans before offering to lend and will understand that some parts of the schedule will require a higher proportion of funding than others.
That means you can streamline the agreed tranches to align with your expected budget and schedule, rather than needing to pause work while you wait for the next stage to be released.
In some cases, the funds are available only in fixed values, spread equally throughout the project. In that case, you need to assess the costs carefully. You might run into cash flow problems during crucial stages where you need more cash to cover the cost of the work. Conversely, you might have a month where the works are less expensive, and end up drawing more than you need - and incurring interest on those unused funds.
Good planning, accurate estimates and having a robust contingency budget are all essential to good development finance cash flow management.
