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Why Use Commercial Property Development Finance?

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 Funding Explained

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.

Types of Development Finance

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:

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

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.

property refurbishment finance

Property refurbishment

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.

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

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 0.7% 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:

  • Commercial Mortgages - As the name suggests, a commercial mortgage works in a similar way to a conventional mortgage, though is issued for the purchase of a commercial property. A commercial mortgage can be more flexible than a traditional mortgage in terms of potential uses, but will often attach a higher APR and associated borrowing costs.
  • Bridging Finance - Bridging loans are similar to development finance loans, but with much more relaxed lending criteria. No specialist knowledge or experience is needed to qualify for bridging finance, which is issued on the basis of security (collateral) and evidence of a workable exit strategy. Bridging finance can also be arranged within a few days, is designed to be repaid after a few months and attaches a monthly rate of interest of around 0.7%; though with bridging finance, the full loan is issued all at once - not in stages.
  • Mezzanine Finance - This is essentially a form of 'top-up' finance, issued as a second-charge loan to supplement an initial loan. For example, if a development finance loan or bridging loan is taken out to cover 80% of the project's cost, a second-charge mezzanine finance product could be sought to cover the remaining 20%.
  • Auction Finance - Auction finance is a type of bridging finance issued for the purchase of properties at auction. When homes and business properties go under the hammer, a 10% deposit needs to be paid on the day and the remaining balance within 28 days. Approval for auction finance can be obtained ahead of the auction, and the funds needed to buy the property (and conduct any necessary renovations) can be arranged within a few working days.

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:

  • Full details of total build costs
  • The purchase price of the site or its current value
  • Information on debts or restrictions on the site
  • Proof of planning permission obtained
  • Estimate of the project's value upon completion
  • Your CV and track record in similar projects

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.

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