Construction companies and developers working on commercial properties have a broad range of funding solutions at their disposal. One of which is specialist commercial property development finance, which is typically issued exclusively to experienced developers with an established portfolio.
Detailed below, we take a closer look at how commercial property development finance works and who could benefit from a development finance loan.
Commercial property development finance is a bespoke funding solution, issued to cover the costs of more extensive and ambitious projects. From new builds to repurposing and renovating existing properties, commercial development finance can be used to fund all types of development works.
Where the applicant meets the issuer's lending criteria, development finance can be used to conduct major works on the following property types:
Retail units, Residential properties, Offices, Warehouses and factories, Hospitals and medical centres, Care and nursing homes, Dental surgeries, Hotels and guesthouses, Pubs and restaurants, Garages and workshops.
Each of these property types can also be used as security for the facility if the value of the asset far exceeds that of the loan being issued.
When looking for 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:
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.
for 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.
a refurbishment loan, which is a type of bridging finance, is 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.
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.
Development finance loans are typically paid in one of the following three ways:
the total loan amount is paid in full, using the profits, when the project is complete, and the properties have been sold.
this usually happens when the developer wants to keep the development for either personal use or for rental purposes.
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.
Developers often prefer to fund their projects externally, as an alternative to their own capital. In doing so, they are able to run multiple projects simultaneously, while keeping their on-hand capital as liquid as possible.
Commercial property development finance can be used for almost any legal purpose, and is particularly useful when needed at short notice. Depending on the specific type of development finance being issued, loans of any size can often be arranged within a few working days.
Most development finance products are designed to be repaid within a few months and attach a monthly interest rate of around 0.5% or less. Rather than being issued in a single lump sum, development finance loans are released in a series of stages, tied to the completion of major project phases.
Specialist development finance (the type released in stages) is typically available exclusively to experienced developers and construction companies. Elsewhere, there are alternative options available for those who may not qualify for a development finance loan.
Each of the following has its own unique advantages and disadvantages, which should be discussed in full with an independent broker before applying:
Each of the above mentioned products comes with its own unique requirements where qualification criteria are concerned. Even so, the basic information you will need to provide when applying for any of these development finance loans is fairly consistent.
Examples of which include the following:
Credit checks are also conducted as standard, but will not necessarily count you out of the running if your credit score is low. However, excellent credit and proof of a strong financial position will always pave the way for a competitive deal on a commercial property development loan.
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.
The purpose of the facility is to provide the developer with additional time to sell their completed development, while keeping costs as low as possible.
Qualifying for finance as a first-time developer can be challenging. This is why it is advised to seek support of an independent broker at the earliest stage.
Our products are suitable for large and small hotel development projects of all types, from repurposing existing properties to building new hotels from scratch.
Joint venture development finance works in a similar way to conventional development finance. However, no deposit needs to be paid and rates are typically higher.
Mezzanine finance, aka mezzanine funding, effectively enables property developers to 'top up' their first-charge development finance facility to access extra funding.
No Personal Guarantee (PG) development loans are effectively a form of unsecured funding for major property development and construction projects.
Whether your goal is to maximise the value of a property you plan to sell or to boost rental income long-term, a refurbishment finance loan could be just the thing.
Senior debt development finance is the primary source of funds in the form of a first-charge loan. It is considered a lower-risk facility on the part of the lender.
Stretched development finance can be the perfect choice for investors and developers looking to stretch their own equity as far as possible with borrowing for up to 90%.
'Light refurbishment' is used for cosmetic upgrades and minor improvements. 'Heavy refurbishment' is used to raise funds for structural improvements.
Commercial property development finance can be used to fund, build or develop a property or be used to expand your current business property or space.