Guide to development finance loans

Posted by Guelane Mansour on 27th November 2019 -

Property development finance is used to fund the construction or conversion of buildings. The loans are usually set up as a mid-term loan, only to be used during the build, with the loan repaid once works are completed.

The repayment of these loans are most commonly made through the sale of the property, or refinance onto more suitable long-term debt.

How to use development finance?

Property development finance is usually secured against the property, or development site, much like a residential mortgage is secured over a house. Unlike a mortgage, property development loans are usually drawn down in stages, as the project progresses.

Initially, an advance is made against the value of the land; this can either be used to purchase the site, repay any outstanding loans that are secured against the site, or to begin construction. Lenders are usually comfortable to advance around 65% on day 1.

Throughout the build, at agreed stages in the build, progress is checked by a monitoring surveyor and as long as everything is on track, further funds are released. This process is then repeated until works are complete and the loan is ready to be repaid.

When borrowing 65% on day 1, lenders could advance as much as 100% of the build costs. This will depend on the amount owing against the total value of the site during the build.

Do I have to make monthly repayments?

No, the monthly payments are usually deducted from any advances, meaning the interest is effectively rolled-up into the loan. This works in the same way as most bridging loans and is particularly useful during development projects as cash flow are still negative.

Development finance rates

The rate charged will depend on a number of factors. The main ones are:

The property developer’s profile: Property development finance applications are largely priced based on the risk presented. Highly experienced developers will usually attract much lower interest rates as they have a strong track record of successful development.

The project itself: The type of scheme being undertaken can also affect pricing. Lenders will tend to favour projects with higher margins or profit on costs. Additionally, if the project is similar to previous developments that have been successfully completed by the applicant, this will be likely to reduce the rate charged.

Location: Some lenders will only lend in certain locations whilst others may avoid certain locations. As such, this can affect pricing as rates vary from lender to lender.

The loan amount: If your loan amount is too low, you may find that the rate charged is higher. Small loans require just as much work to arrange as larger loans, and as such, the lender will have to charge more to ensure that it is still profitable for them. Economies of scale are heavily at play in almost all areas of property development.

What is required to start the process?

• A copy of your passport or driving licence

• Proof of address (not older than 3 months)

• Asset & Liability statement

• Full details of the property

• Schedule of accommodation

• Valuation report (if available)

• Budget/development appraisal

• Amount and terms required

• Exit strategy

At Krios Capital Partners, we can support you in devising a successful funding strategy to secure the development finance and help you unlock your project’s full potential.

Should you have any enquiries, you can get in touch with us at [email protected].