Why use commercial property development finance?

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 with an independent broker before applying:

• Commercial Mortgages: As the name suggests, a commercial mortgage works similarly 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.