Property development finance options
Added by Love Business East Midlands | 27 September 2012
UPDATED: 27 August 2013
During recent years property developers have struggled to access finance to fund projects. This is due to the reluctance of high street banks’ to lend for both refurbishment projects and new build developments.
Property Development Finance - Who can borrow ?
Borrowing against the projected increased value of the development you can achieve as much of 100% loan to value. But this depends on the details of your specific development, your developer experience, the location and the nature of the project.
What type of property development are you undertaking?
• Residential, commercial or mixed use?
• Refurbishment to sell or to rent?
• New build or conversion?
Do you have planning permission and if so, is it full or outline?
There are four key types of property development finance and these are most suitable for larger projects with full planning permission, project plans and cash flow projections in place. However, if you only have outline permission there are other development finance options where the proposal is absolutely tailored to you and the specific development project.
What are the four most common types of property development finance
1) Senior Debt Loan
A senior debt loan usually covers up to the first 80% of a property development loan to value. It can be arranged against gross development value with additional security. Interest payments can be deferred and regular draw downs can be agreed in advance for small projects. Senior debt gets its name because it has greater seniority in the issuer's capital structure than subordinated debt. Which means, in the event the issuer goes bankrupt, senior debt theoretically must be repaid before other creditors receive any payment.
2) Mezzanine Loan
A mezzanine loan is a second charge loan (or subordinate debt) on top of the senior debt loan, hence the name "Mezzanine". Very similar to a short term bridging loan, and often used in the same way, it enables to fund development costs on one property while a developers’ capital is invested elsewhere. Because they are higher risk the monthly interest rates will be slightly higher but you can achieve loan to value of as much as 90% to 100%.
3) Joint Venture Finance
100% funding can be available on a joint venture basis where property development finance is provided to underwrite the project costs and share the profits on completion. How the joint venture is set up depends on what you are trying to achieve. A clear legal agreement setting out how the joint venture will work and how any income will be shared is drawn up. Entering into a joint venture is a major decision but it means experienced property developers can avoid the frustration of a valuable opportunity slipping through their hands.
4) 100% Property Development Finance
In some instances, for example where you own the land already, or the projected profits are above average. In these circumstances you can negotiate a bridging rate type finance or an exit fee based option without the need for a profit share.
The right finance package can make or break the profitability of your project
Raising finance can be a minefield and having a good relationship with an expert lending partner who understands property development can pay huge dividends. The opposite is also true, engage a lender who is dabbling in property development and you are likely to find problems around every corner.
Financing for property development works in different ways, funds can be released in stages and repayments can be deferred until such time as you sell the property, or secure a commercial mortgage based on the final valuation after work has been completed.
You may be able to get a commercial mortgage that will lend on property development. However, the distinct advantage of a specialist short-term loan is that you may be able to get the funds you need quicker, over a shorter term (where the loan is easier to redeem if you intend to develop and sell).
How to get the best property development finance deal
To get the best deals in the current tough economic climate you must be able to demonstrate very strong credentials to secure a loan, having one or more of the following:
• A proven record of successful developments in the past
• Agreed ‘off-plan’ buyer(s)
• Already own the land and have planning permission
• Can show that the development will service a strong rental demand where the building is speculative
The key to good property development finance is partnership
Working in partnership with a lender who understands property and the unique challenges and issues it presents enables you to focus your energies on your development project. It can also provide a valueable second opinion, better financing solutions for more challenging projects and remove the worry about the finance package not being ideally suited to the circumstances.
This article is by Gary Poulton, a Director or Redrock Commercial Finance. If you want to understand how to raise business finance quickly visit www.business-bridging-loan.co.uk
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