- Purpose: To fund the construction or substantial renovation of properties, including residential, commercial, or mixed-use developments.
- Term Length: Generally short-term, often ranging from 6 months to 36 months, depending on the project's scope and timeline.
- Funding Structure: Typically provided in stages, with funds released at various phases of the project, such as land purchase and construction milestones.
- Interest Rates: Higher than traditional mortgages, reflecting the higher risk associated with property development.
- Loan-to-Cost (LTC) and Loan-to-GDV (LTGDV): LTC typically ranges from 70-80%, and LTGDV (Loan to Gross Development Value) often ranges from 60-70%.
- Exit Strategy: A clear exit strategy is crucial, such as selling the completed property or refinancing with a longer-term loan.
Common Uses of Development Finance
1.Residential Developments Funding the construction of new housing developments, such as apartment complexes or housing estates.
2.Commercial Developments Financing the building of commercial properties,including office buildings, retail spaces, or industrial units.
3.Mixed-Use Developments Supporting projects that combine residential, commercial, and/or leisure facilities in a single development.
4.Refurbishment Projects Financing major renovations or conversions, such as transforming a derelict building into residential flats or updating outdated commercial properties.
5. Land Acquisition Purchasing land with the intent to develop it into a residential, commercial, or mixed-use property.
Lender Requirements
1. Detailed Project Plan Lenders require a comprehensive development plan, including architectural designs, planning permissions, cost estimates, and timelines.
2.Experienced Developer Demonstrating experience in property development can significantly improve the chances of securing finance. Lenders prefer developers with a proven track record.
3.Valuation and Appraisal A professional valuation of the land and the completed project’s Gross Development Value (GDV) is essential.
4. Deposit/Equity Developers are typically required to invest their own capital, often around 20-30% of the total project cost.
5. Exit Strategy A clear plan for repaying the loan is crucial, whether through the sale of the developed property, rental income, or refinancing.
6.Creditworthiness Both the developer’s personal and business credit history will be scrutinized.
7.Contractor Details Information about the contractors and their experience may be required, as well as the terms of their engagement.
8.Financial Stability Proof of financial stability, including business accounts, tax returns, and possibly personal financial statements.
Types of Development Finance
1. Senior Debt The primary loan used to fund the bulk of the project’s costs. It is typically secured against the property being developed.
2.Mezzanine Finance A secondary loan that sits between senior debt and equity. It can help fill the gap if senior debt and the developer's equity don't cover the entire project cost.
3. Equity Finance Developers may raise capital by offering equity in the project to investors, who then share in the profits.
Advantages of Development Finance
- Tailored Financing: Designed to meet the specific needs of property developers.
- Staged Release: Funds are released at key project milestones, ensuring that the money is used effectively.
- Supports Growth: Enables developers to take on large-scale projects that would otherwise be financially out of reach.
Disadvantages of Development Finance
- Higher Interest Rates: Reflect the higher risk compared to traditional property loans.
- Stringent Requirements: Detailed project plans,professional valuations, and proof of financial stability are essential.
- Increased Risk: Developers need to have a clear exit strategy to ensure the loan can be repaid.
Final Thoughts
Development finance is a specialist form of funding tailored to the needs of property developers. It provides the necessary capital to undertake significant construction and renovation projects but comes with stringent requirements and higher risks compared to traditional property loans. It’s crucial to have a well-thought-out project plan and a clear exit strategy to secure this type of finance. If you think development finance might be the right solution for you, we recommend you get specialist advice to help you understand the process and find the best option for your needs. At L&C Mortgages, we specialise in a wide range of mortgage products, but we do not advise on development finance. To ensure you receive the best guidance and support for your project, we have partnered with Propp, an expert in specialist property finance. Propp is an award-winning specialist broker with extensive knowledge and experience to help you secure the right funding tailored to your specific needs.
Important Note on Broker Fees
Unlike L&C Mortgages, Propp does charge a fee for its service. For expert advice on commercial loans, we recommend you contact Propp, who will clearly explain their fees and service before you commit to using them.
Specialist mortgage advice is provided by Propp, who are authorised and regulated by the Financial Conduct Authority (914408). Propp is not a part of L&C, nor is L&C a part of Propp.
L&C receives a % of the commission that our partner Propp earns. All applications are subject to lending and eligibility criteria.
Propp is a credit broker, not a lender, that works with the whole of the market.
The FCA does not regulate commercial mortgages.
