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Development Finance

There are many obvious advantages when it comes to utilising property development finance to fund a project. Even if you have the amount of cash needed already available, it is worth looking at the benefits of a development loan for at least part of the project.

The pros of development finance include:

  • Having access to funds for property development purposes allows borrowers to take on bigger projects than they would usually be in a position to finance.
  • Helps to maintain a healthy cash flow until the development has been sold.
  • Enables developers to fund multiple projects at the same time and negates the need to wait for one project to sell before being able to start the next one. Access to vital funds will ensure you do not miss out on any development opportunities that may come your way.
  • The less capital you put into the project, the higher the return on investment (ROI) will be. You will need to consider the finance costs, which will be taken from the profits, but as your personal investment is smaller the return on the invested amount will be higher.

Types of Development Loans

When looking for property development finance it is important to identify the type of project being planned by the developer in order to access the correct funding product. Types of works can include:

ground up build development finance

Ground up builds

New builds nearly always require development finance loans. Once the project is completed, developers may use development exit finance as a more cost effective solution, but this cannot be done before the project is watertight.

property conversion or restoration finance

Large scale restoration and property conversions

To accommodate this type of project refurbishment finance is typically the correct type of loan to use, however if the project is larger than the norm, development finance may be a better alternative.

property refurbishment finance

Property refurbishment

A refurbishment loan is a type of bridging finance generally used for property renovations. It can be used for various improvements including, installing a new roof, general structural changes, building an extension, refurbishment, and decoration.

bridging loan property development

Bridging loan for property development

Property investors or developers may want to buy property which needs development or completion work still doing and are unable to get funding from their bank. This is a typical scenario when a bridging loan is a suitable alternative.

How is Development Finance Repaid?

Development finance loans are typically paid in one of the following three ways:

Paid in full

The total loan amount is paid in full, using the profits, when the project is complete, and the properties have been sold.

refinance with long term loan

Refinancing using a long term loan

This usually happens when the developer wants to keep the development for either personal use or for rental purposes.

development exit finance

Refinancing using a Development Exit Bridging Finance

This type of short term loan is often used to fund a new development project before the current project is sold. It can also be used to give developers a bit of breathing space to complete minor works and find buyers.

Frequently Asked Questions

If you have your land secured and a have a fair idea of the costs involved and the end values, then it is time to give us a call to discuss your development project. During the call we will explore your finance needs and discuss with you the best finance products to suit your plans.

We will require the following:

  • Current value of your property if you own it
  • A cost breakdown for the renovation/conversion/build
  • Contingency plans and costs
  • Expected timescale for the development
  • Anticipated end value of the project
  • Any experience the developer may have in past projects in particular property development
  • A list of specialists and professionals who will be involved in the development, e.g., builders, architects, site manager etc.
  • Copies of any planning permissions needed for the build or renovation
  • Building regulations
  • Any planning restrictions or Section 106

There are 7 stages from initial enquiry to completion when applying for a development loan:

  • Enquiry - After finding suitable land and planning permission has been granted, it is a good time to contact us to enquire about a development loan.
  • Indictive Terms - After your first consultation with one of our team, if you are happy with the product you have been advised to apply for, you will be provided with a brief development overview which will lay out the indicative terms from the lender. This typically is done within 24 hours from initial enquiry.
  • Agreement in Principal -Meaning the lender will set out the outline of the offer for finance, including fees. This offer is subject to a number of conditions including, planning permissions, value of the property etc.
  • Site Visit - Typically the lender will want to visit the site as well as meet you and the professionals who will be involved in the project.
  • Valuation - Valuation of the property must be carried out by a professional surveyor where the potential profit and viability of the project will be evaluated.
  • Offer - Before an official offer is given, your loan application must be underwritten. This means that the contract terms will be confirmed including all costs and fees. At this point you will require a solicitor to act on your behalf, who will have a better understanding of how to navigate through the legal processes of property development finance. Make sure you choose a solicitor who has experience with development loans to avoid any delays.
  • Completion - Completion refers to the loan being fully arranged, approved and funds released to the developer's solicitor. This is when your contribution will be added to the loaned funds in order to complete the purchase. When this is finalised then the development project can commence.

The amount will differ depending on the type of development project. Once we have identified what funds you will need we will structure your finance to meet your requirements.

It is important to factor in any additional costs when taking out finance. Costs and fees to take into account include:

  • Set up costs - This is a charge that is calculated as a percentage of the entire loan amount. This is typically 1% or higher and will be added to the total amount to be repaid.
  • Exit fees - This cost is based on the total loan amount or the final value of the development project and is generally charged at around 1%.
  • Interest - There will be a monthly interest charge which will increase as funds are released. In most instances the interest amount is added to the loan which is referred to as 'roll up of interest'.
  • Professional fees - These are the costs of any professionals you will need during the development process, including, architects, builders, solicitors etc.
  • Contingency costs - This is the amount of funds which have been set aside to cover any unforeseen expenses. An average contingency amount of 15%-20% of the developments total cost is typical.

Complying with building regulations and getting the relevant planning permissions is of the utmost importance. Building Regulation Approval can be granted through your Local Authority Building Control Service. You are entirely responsible for complying with building regulations if you are doing the build yourself. If you are employing a building contractor then the responsibility will generally fall on them, but ultimately the owner is responsible and may be served with enforcement notices if there are any regulations not adhered to.

Yes you will need planning permission for your development project.

  • Outline planning permission - this type of application negates the need for the preparation of detailed plans for the development of land/ conversion of properties. When applying for this type of planning permission you can reserve one or more of the following: siting, design, means of access, external appearance, landscaping, until full approval is applied for. Outline planning is valid for 3 years but can be stretched to 5 years.
  • Approval of Reserved Matters - this is needed following the application of outline planning and lays out any outstanding details of the proposed development. This application must be done no later than 3 years after outline consent has been given.
  • Full/Detailed Planning Permission - you will not necessarily need to apply for outline planning permission before applying for a DPP. When developers are ready to go they will be able to apply straight away but will be required to provide a very detailed development plan. Once permission has been granted the development can commence straight away.
  • Section 106 - Section 106 of the Town and Country Act 1990, allows authorities to enter into a legally binding agreement or planning obligation with land owners by granting planning permissions. 106 agreements are a way of addressing necessary issues in order for a development to be viable in planning terms.

At each stage of the development, you will need professional checks to ensure that all building regulations have been adhered to and works have been completed to an expected standard. This is typically done by your architect or through the NHBC.

NHBC stands for National House-Building Council. The NHBC is an independent provider of insurance and warranties for new homes.

A fixed price contract refers to a contract with your builder that fixes the costs that you will pay and will not change, even in the event of additional or unexpected costs. This can prove to be beneficial for both the builder and the developer as the builder will be able to charge higher fees, whereas the investor will know exactly what the costs are giving total peace of mind. Lenders are also more likely to lend for projects that have fixed term contracts.

Development Finance Products

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