What is Development Finance?
Development finance is a type of lending that helps businesses, entrepreneurs, and property developers to access funding for ground up developments or conversions – including both residential and commercial property- where the necessary planning permissions are in place.
This finance is used to either buy land, or cover 100% of build costs and professional fees associated with a project. It is a specialised form of finance that is mainly targeted towards development projects such as construction, refurbishment, conversion and renovation.
This type of funding is often used when traditional loans and other forms of financing are not available or don’t offer enough funds.
Who is Development Finance for?
Development finance offers a valuable funding solution for property developers, businesses, and entrepreneurs seeking financial support for their development projects.
What Types of Projects Are Eligible For Development Finance?
Development finance is typically used to fund ground up house builds, including larger schemes where affordable housing is required, multiple occupancy apartment projects or mixed schemes that include commercial and residential units. It can also be used to build large industrial estates, retail outlets and manufacturing sites.
How Much Can I Borrow For Development?
Lenders typically provide up to 65 percent loan to Gross Development Value (GDV) and 90 percent loan to cost. However, sometimes lenders will lend further funds, if additional security is available.
How Does Development Finance Work?
Typically a development finance loan is paid in tranches as the development progresses and is typically repaid from either sales or refinance of the property at each stage of completion. Depending on the size of the scheme, developers may need to phase the development as they are unable to build or sell all the properties at once and so, to avoid accruing interest on a full development finance loan, developers will often take a certain amount- called a peak debt- to fund the first phase of the development and then repay that debt by selling off property from the first phase of building. However, there may be infrastructure required to support the whole scheme which is needed before any properties or units can be built and in this case development finance can fund up to 100 percent of the infrastructure build costs.
What are the advantages of development finance?
Development finance offers a number of benefits, such as providing access to financing for projects that traditional lenders may not fund. It also allows for flexible draw downs and repayment amounts and term, meaning borrowers can choose to match the loan drawdowns to the cashflow needs of their project which can be split into phases and thus minimise the borrowed funds -and interest accrued. Development finance allows developers to gear up and be on multiple sites simultaneously, or roll from one site to the next, so with no or minimal gaps.
Can I use Development Finance on more than one project?
Yes, one of the benefits of development finance is that developers can use it to fund more than one scheme simultaneously. As separate projects progress, loans can be repaid and further finance can be taken out.
How Much Cash Contribution Do I Need For Development Finance?
The amount of cash contribution that is required for development finance can vary depending on the project and the lender. This can range from 5-40% of the total cost which includes:
Purchase price, Professional fees, Build Cost plus 5-10% contingency, Tax liability – CIL, S106 and sometimes SDLT, Lender interest and fees.
To understand how much you can potentially borrow on a scheme use our Development finance calculator [LINK] or speak to one of our experienced brokers.
What is the typical interest rate for Development Finance?
Interest on Development Finance loans ranges from 4% to 7% above Bank of England base rate. *
*(values correct as of May 24)
What are the typical terms for development finance?
Subject to project timelines, development finance is a short-term funding option, usually for between 6-24 months. It is designed specifically to ensure you have enough time to reach practical completion and sell the units to repay the bank within the term. This is determined by your estimated timescales and back up by the surveyor and Quantity surveyor.
What fees are associated with Development Finance
Typical fees are:
- 1% for the lender as an arrangement fee
- 5% to the lender as an exit fee
- 2% for the commercial broker on loans under £3m and 1% for loans above £3m
- Associated professional fees, from the chartered surveyor, quantity surveyor, and lender’s legal team.
- Application fee of between £495 to £1,495 depending on the complexity of the loan
- Plus a range of insurance costs including New Build Warranties, Site Insurance and Builder’s PI
How Do You Repay A Development Finance Loan?
When the development project has completed, the borrower will typically need to repay the loan. Repayment of the loan is usually from sales of the units in a project or the refinance of the project. During the life of the project interest owed is usually rolled up monthly and added to the loan – it is then repaid with the principal of the loan.
Development finance for Green schemes.
To encourage more energy efficient builds, if a developer achieves a Standard Assessment Procedure (SAP) rating of 89 or above on a new build property, some lenders will reduce their arrangement and exit fees and simply charge the interest rate on a development finance loan. This is partly funded through the Homes England scheme which is backed by the government.
How do I apply for Development finance?
The best way to apply for a development finance loan is through a recognised Commercial Finance Broker. Brokers will have access to lenders and terms that are not available directly to the applicant but brokers will also be able to assess the feasibility of the scheme and assess the best deal and the right lender for your project or criteria.
During the application process, we will also liaise with a network of other professional services that will be involved with the project.
There are also a number of insurances and licences that need to be in place includng:
- Site insurance
- The new build warranty from NHBC or BuildZone
- Professional indemnity insurance
- A license over the architect’s drawings
- Professional indemnity insurance from the architect, the structural engineer, sometimes even the planning consultants
- Full cash flow forecast from the quantity surveyor
Depending on project feasibility, profitability, and financial standing, lenders will assess your application. The lender will provide a formal loan offer with detailed terms and conditions if approved.
At this point your broker will also assess whether further funds or securities are required from the developer in order to meet the lender’s requirements.
Benefits of working with a commercial finance broker
A corporate finance broker can assess the viability of scheme in terms of the projected build costs and identify any other unforeseen expenses which need to be covered by the development finance.
They can also obtain accurate the gross development value (GDV), working with local estate agents, to ensure the final valuation is achievable and that the completed buildings or units can be sold within the time frame laid out by the developer.
Brokers can have more leverage with lenders to renegotiate terms if any complications arise, or get extensions to the loan term if the build time takes longer.
Options across the finance market
There are so many different development finance mechanisms in place to enable developers to fund their build schemes and make a healthy profit.
We assess the right route to the finance market and identify the right model to get you the desired finance.
We then provide support for the whole scheme through to completion and eventual sale or refinance.
For more information on development finance options contact one of our experts today.