What is Development Finance – A Complete Guide

Finance

Are you planning to undertake a property development project? You might be looking for financing options to fund your development project. Specialist property development finance is often used by most property developers and investors in the UK who wish to undertake construction or renovation works. In this comprehensive guide, we will go through various nuances of development bridging finance loan London, how it works and how it can benefit property development projects.

What is Development Finance?

Development finance is a specialist financing product that is particularly used to fund property development projects for residential, commercial and mixed-use properties. These specialised loans can provide funds to cover a range of property development expenses, such as land acquisition, building costs, renovation costs, planning permission fees, etc.

Unlike traditional loans, property development finance considers the final value of the proposed project with the expectation that the value of the property will increase by the end of the loan term. It is a short-term funding solution, often lasting from 4 months to 2 years.

How Does Development Finance Work?

Development finance is often used for undertaking two types of projects: purchasing the land for development or funding the construction project.

Purchase of land – The initial part of development financing is purchasing the land for either constructing the building from scratch or acquiring the existing building for renovation. This phase provides the developers with the funds they need to secure the site for the development.

Capital for the build – The second crucial stage involves raising capital for the actual development. During the development phase, the funds are released in stages based on the progress of the development project. The lender will examine the progress of the project before each payment is released.

The amount you can borrow mainly depends on the type and size of the project, the Loan-to-Value (LTV) and the Gross Development Value (GDV). The GDV is the projected value of the project after completion, and the LTV is the percentage of GDV that the lender is willing to provide. The bridging loan interest rate London and associate fees may vary depending on the size of the loan, the loan term, the developer’s credit history, the feasibility of the project and the lender.

Development finance is usually secured against the value of land or property being developed. Lenders require collateral to avoid the risk in case the borrower is unable to repay.

What are the Types of Development Finance?

Development finance can be used for various purposes. Choosing the right type is essential to unlock its full potential.

Ground-up Construction – From acquiring land to developing a property from scratch, development finance provides the required funds for every phase of the project. The amount is released in stages, ensuring seamless and efficient use of funds.

Refurbishment Project – Development finance can also be used to renovate existing properties. From small upgrades to large-scale extensions, property developers can raise capital to undertake any kind of refurbishment work for residential and commercial space.

Conversion Finance – Conversion finance refers to the finance provided to convert existing structures into new types. This includes transforming residential units into commercial space, or converting a warehouse into an office space.

Step-by-Step Process of Accessing Development Finance

The process of accessing development finance typically involves several key stages.

Step #1 Project Planning

Project planning involves defining the project scope, timeline and budget as well as conducting a feasibility analysis to evaluate the project’s viability. Develop a detailed plan that includes market research, construction plan, project costs, potential returns, regulatory compliance and risk mitigation strategies. Presenting a clear vision and realistic projections sets the foundation for accessing development finance.

Step #2 Finding Suitable Development Finance

Once you are ready with your project plan, it is time to find suitable development finance lenders to fund your development project. Prepare and present your financial application to several lenders to discuss terms and conditions of development finance.

Step #3 Due Diligence

Lenders will then conduct legal due diligence on the proposed development project, which can include property evaluations, site visits, the feasibility of the project and potential returns. Afterward, the lenders will extend indicative terms and conditions to the borrower, including the amount they are willing to lend, interest rates and repayment terms.

Step #4 Official Loan Agreement and Completion

After the loan offer is accepted, legal documentation and formalities will be carried out between both parties involved. The deal will be finalised and the drawdown of funds will be initiated. This usually happens in stages based on the project milestones. Carefully monitor your cash flow to ensure the funds are used as intended.

Step #5 Project Commencement & Monitoring

With the funds received, developers can now commence the development project according to determined plans and timelines. It is also essential to carefully monitor the progress of the project to ensure adherence to planned budget and quality standards.

Step #6 Repayment

Repayment of development finance usually happens when your project reaches its completion stage. Make sure the entire work undertaken meets the required standards and specifications. You can either sell or refinance the completed development project to repay the loan, along with the interest rates and associated fees.

Common Fees Associated with Development Finance

Interest rates – Interest rates in property development finance range from 4% to 12% per annum, mainly depending on the developer’s experience, location, project type, loan amount and risk tolerance.

Arrangement fee – Usually 1% charged by the lender for providing finance.

Administration fee – This is the fee charged for loan management and administration.

Valuation fee – A fee paid to the surveyor for assessing the value of the land, the project’s gross development value and build costs.

Legal fees – Both lender and borrower will incur legal fees for completing the legal formalities associated with the loan. This fee is typically paid by the borrower.

Monitoring surveyor fees – A fee is paid to the monitoring surveyor for professional oversight to ensure compliance with regulations. This fee is dependent on the size of the project and the frequency of inspections.

Broker fees – If you use a broker, he might charge a fee, which is usually 1% or 2% of the total loan amount.

Exit fee – An exit fee is paid when the loan term ends and the loan amount is repaid. 

Final Thoughts Property development finance is a popular financial solution in the UK for property developers, investors and landlords looking to undertake a ground-up development or refurbishment project. Having a complete understanding of what development finance in London is and how it works is essential for successful property development. By understanding these intricacies, developers can smoothly navigate the complexities of development finance and achieve desirable outcomes.