There are several exciting opportunities – for new and existing property developers – including energy efficient developments, conversions of retail units to flats and proposed reforms of the planning system by the government.

As a result, we are seeing an increase in development inquiries so we have created this short introduction to development finance to help clients – existing and new – understand the type of projects that development finance can be used for, the costs involved and how the funds are paid.

What is a development finance?

There are several exciting opportunities – for new and existing property developers – including energy efficient developments, conversions of retail units to flats and proposed reforms of the planning system by the government.

Property development finance is a type of short-term, secured finance that is used for many small, medium, and large-scale property projects, including renovations, office block conversions or to purchase and build on previously undeveloped land from the ground up. Development finance is used by many different types of people from private individuals to portfolio developers and small to large companies.

Unlike a traditional mortgage, development finance is a short to medium term loan that is secured against the projected gross value rather than the current value of the land/property. It can be complicated so it is beneficial to use an experienced broker.

What can development finance be used for?

What are the different types of development finance?

• Residential property – development finance may be used to build one or more house, convert an office block or retail unit into houses/flat, build an apartment block or renovate a residential property. This can be used by developers looking to sell or rent the property or individuals looking to build their dream home.

• Commercial property development – used to build or convert properties that can be used for offices, retail, and leisure – including mixed office and retail. Light redevelopment /refurbishment
properties which includes aesthetic and non-major structural are better suited to alternative short-term funding such as bridging finance which we can also help you with.

• Ground-up development – this type of finance will fund a project from the purchase of land through to completion of project. For example, the purchase of undeveloped land to build a cluster of new homes.

• Heavy refurbishment/ renovation – this type of finance will fund projects that involve major building works to an existing building. For example, converting a retail unit into a residential property

There are a number of costs to be aware of when obtaining development finance:

• Lender arrangement fee – this is normally charged by the lender as a setup fee for the loan, usually 1 – 2% of the value of the loan.

• Professional fees – there are several professions involved in a development project including architects, solicitors, and project managers. These fees will depend on the size of the project, but it
is worth noting that they can be included in the loan amount.

• Interest Rates – as mentioned in the previous section, the lender will charge a monthly interest rate, however this will be ‘rolled up’ and payable as part of the final outstanding amount once the
development has completed.

• Broker fees – in return for managing an application and sourcing the most suitable lenders, brokers will usually charge a fee of around 1%, however this will vary from lender to lender.

• Valuation fees – the lender will require a third party to undertake an initial valuation, which usually includes a valuation prediction for the finished project.

• Monitoring fees – lenders will want to monitor the progress of the development to ensure the work is going to plan and being completed to a high standard.

• Exit fees – again these fees will vary from lender to lender. The exit fee is typically 1-2% of either the GDV or the total loan amount.

By on July 28, 2021   /   Blog  
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