Development Finance

Why use development finance?

Embarking on a property development project can be costly, regardless of the project type. For example, you may want to drastically improve your residential property, such as increasing its size and modernising it. You may want to convert a commercial property into a residential one to retain as an investment. You may have found an uninhabitable property at a bargain price that you want to buy and renovate. A green development project may be high on your list of undertakings. You may wish to build a block of flats for resale purposes. Whatever your development plans, you may lack the funds to proceed with the project. This is when a property development loan allows you to go ahead, ensuring that you don’t miss out on a valuable opportunity.

To benefit from this type of funding, you don’t need to be an experienced developer. Whilst many development finance lenders prefer you to have some experience, we also work with lenders who consider first-time developers. You can apply for a loan as an individual, a partnership, an LLP, an SPV limited company, a business or as an overseas investor looking to proceed with a development project in the UK.

As well as being versatile in its uses, development finance can allow you to fund a bigger project than you might otherwise be able to undertake. You can also work on multiple projects simultaneously or proceed with a new development project while you’re waiting to sell an existing one. By not tying up large sums of cash in the project, you maintain your liquidity throughout and by investing less capital into the project, you’ll increase your return on investment.

How does development finance work?

Development finance allows you to buy a plot of land, if needed, and build a property from scratch or carry out extensive work on an existing property, such as a conversion or refurbishment. Due to the nature of property development, the finance aspect works differently from standard residential and commercial mortgages. Instead of the funds being released in one go to purchase an existing property, the funds are released in stages during your project. These are key development stages and your project is monitored by the lender to ensure that each stage is completed as pre-agreed. For example, one stage may allow for the foundations to be built. Another stage may cover the costs of the roof being fitted. This way, your project stays on track through to completion. Any risks are mitigated for both you and the lender.

You also only pay interest on the loan stages as you use them rather than paying interest on unused funds held in the drawdown facility. The interest charged on your development loan is usually rolled up. This means that it’s repaid at the same time as your loan, which helps with your cash flow during the project as you don’t have to pay it monthly.

The funding stages

The development finance lender will release the funds to you in the following stages:

• The initial payment. This allows you to purchase the development site. You may need land to build new properties on, for example. Or you may want to buy an existing property to refurbish, convert or demolish to build a new property in its place.
• The remaining payments. The rest of the loan covers the building costs. Instead of being paid in one go, lump sums are released in line with the schedule of works you pre-agreed with the lender. At each stage, the lender will check the progress made. This helps to ensure that you stay on track with the work carried out and you also stay on budget.

What can you use development finance for?

Development finance covers a vast range of uses. As each development project is unique, so too is the development finance facility. A bespoke funding solution will be created for you to precisely meet the needs of the project you wish to undertake. There are different types of development finance available to suit a range of project types as well as numerous uses for development finance, as detailed below.

Types of development finance

• Residential property development
• Semi-commercial and commercial property development
• Single-units to large schemes with multiple units
• Refurbishment, conversions and renovations
• New builds
• Airspace development
• Green development finance
• Student accommodation development finance
• Regulated development finance. Development finance is generally unregulated. However, if 40% or more of the development is to be used for residential purposes, it will be regulated. This means that it will be overseen by the Financial Conduct Authority (FCA), offering consumer protection.
• Mezzanine finance. This provides additional funding to the development finance secured for your project.
• Development exit finance. This enables you to repay your existing loan while financing a recently completed development that hasn’t yet been sold or refinanced.

As mentioned above, each development project is unique and yours may require an amalgamation of different types of development finance. Our expert brokers will discuss your project plans in-depth with you to ascertain the best financing type(s) required.

Development project types

• Light refurbishment: This includes non-structural, mainly decorative work, such as fitting a new kitchen and bathroom, replacing the windows, laying new flooring and installing central heating. For this type of development project, planning permission won’t be required and you won’t need to comply with any building regulations. As this project type doesn’t alter the nature of the property and is small compared with other development project types, it usually comes with a lower interest rate.
• Heavy refurbishment, renovations and conversions: This includes structural changes, such as moving internal walls, converting the loft, building an extension or fitting a new roof. Property conversions, such as converting a large building into individual flats, and property restoration are also included in this category. As this project type involves significant changes to a property, requiring a longer loan facility and increasing the lender’s risk, the interest rate will be higher.
• Ground-up development: This is when you build a property from scratch, either by purchasing land and building on it or purchasing an existing property to demolish and then building a new one in its place. This project type is extensive and the development finance required is complex. Although development finance for ground-up developments is offered to first-time developers or those with little experience, you will benefit from better interest rates as an experienced developer.

Development finance uses

Development finance offers incredible flexibility in its uses. Some of these uses include, but are not restricted to, those detailed below. You can use it to:

• Purchase land to build on
• Convert, refurbish or renovate an existing property
• Construct a new property
• Pay for professional fees, such as planning fees and legal costs
• Cover infrastructure costs
• Provide you with working capital throughout the project

Cover the costs of selling the development, including marketing costs

Eligibility criteria for development finance

Development projects vary greatly and, as a result, so do the criteria applied by lenders for development finance. No matter how simple or complex your plans are or whether you’re a new or experienced developer, we deal with specialist lenders who can help you. This includes approving your loan if you’re unable to pay a deposit or have adverse credit. Generally, you need to ensure that the project is viable, you’ve calculated the costs correctly, the finished development is profitable and you can repay your loan. Your lender will request a considerable amount of information, which usually includes:

• Your identification documents
• A list of your assets and liabilities
• Planning permission details
• Designs or drawings
• Detailed costings
• A schedule of works
• Details of your previous development experience
• Details of your project’s team, such as the project manager, architect and builders
• Any restrictions that may impact your project
• The land or property purchase price or, if already owned, the value
• The projected value of the completed project
• Your exit strategy

We can prepare your tailored development finance application

Our commercial finance brokers are ready to discuss your project in detail to ascertain the type of development finance you need. Located in Kent, London and Edinburgh, they can advise you on the information required for your application. This varies according to different lenders’ criteria and depends on the details of your development project. Our brokers will ensure that you have a comprehensive list of everything required specific to your application. When you have this information ready, they will tailor-make your application, catering to your precise needs for a development loan. To get started and benefit from a fast turnaround with flexible terms to meet your requirements, simply give us a call on 01322 907 000. If you prefer, send an email to us at info@trinityfinance.co.uk or an enquiry via our contact form. One of our development finance brokers will reply to you as quickly as possible with more information.

How much can you borrow with development finance?

Lenders’ minimum and maximum loan limits vary greatly, with some offering loans that start at £50,000 and others setting maximum amounts of £50 million, for example. The amount they are willing to offer is determined on a case-by-case basis. Your development experience, the amount you want to borrow, your financial situation, the viability of your project and the size of your deposit will be considered. The current value of the site, the build costs and the gross development value (GDV), which is the end value of the completed project, will also be taken into account. Development finance lenders tend to offer 65% to 70% of the current land or property value. They generally provide 100% of the build costs.

Is 100% development finance available?

As mentioned earlier, it’s possible to secure property development finance without a deposit. You may have completed a project and want to move on to your next one but haven’t sold any units yet, for example. Or you may be working on multiple projects with no funds spare to cover a new project’s deposit. For the lender to agree to 100% development finance, there are different options for you to consider. One is to release equity from your property to raise some funds quickly. Another is to provide additional security for the lender, such as another property or asset. A third option is to apply for joint venture development finance. In return for borrowing the full project costs with the last option, the profit from the completed project is shared between you and the lender. You may have to pay higher costs to benefit from 100% development finance.

The costs involved with development finance

When calculating the costs of development finance, you need to factor in the interest charges and fees payable. These will be determined by factors that include your development experience, the amount to be borrowed, the percentage of overall costs borrowed and the term that the property development loan is taken out for.

Interest

Development finance interest rates tend to be higher than other types of funding due to the risk involved. However, the interest rates charged vary considerably with the lowest ones tending to be offered to experienced developers. As development finance is a short-term loan, the interest rate isn’t as important as it would be with a mortgage, for example. Depending on your circumstances, you may benefit from having a low interest rate but end up paying high fees so it’s important to weigh up the total costs.

The interest is usually rolled up, which means that you repay it at the same time as your loan rather than in monthly instalments. This allows you to continue with your project without having to worry about finding extra funds each month to cover the interest payments. As well as that, you usually only pay interest on the funds used from the drawdown facility. This means that you don’t pay interest on unused funds still held in the facility.

Fees

Various fees are charged for development finance and these differ depending on your project. They usually include:

• An arrangement fee. Also known as a facility fee, this is charged by the lender for setting up the loan facility. It tends to be between 1% and 3% of the total loan amount.
• Valuation fees. A surveyor has to carry out a valuation before your project starts to ascertain the site’s current value. Another valuation has to be done when your project has been completed to confirm the GDV.
• Monitoring surveyor costs. The lender will usually instruct a monitoring surveyor to oversee your development project and provide them with progress reports. These reports will reflect whether your project is on track regarding the schedule of works and build costs as well as ensuring that any building regulations are met.
• Legal costs. As well as paying your own solicitor’s fee, you’ll more than likely be responsible for paying your lender’s legal costs.
• Other professional costs. You need to factor in the costs of professionals working as part of your project’s team, such as the project manager, an architect and the builders.
• Drawdown fees. A fee is charged each time funds are released to you from the loan facility.
• Non-utilisation fees. These fees may be charged by the lender for funds that have been made available to you in the loan facility that you haven’t yet used.
• An exit fee. This is usually charged at about 1% of the GDV or total loan amount.

You also need to have a contingency fund to allow for any unforeseen issues that may occur. Typically, about 15% to 20% of the development costs are considered a good amount to set aside for any contingencies.

Repaying your development finance loan

You need to provide the lender with details of your exit strategy before they will offer you a loan. The three main ways to repay development finance are to:

• Sell the finished development. You can then repay the loan from the sale proceeds.
• Refinance to a long-term loan. When you wish to retain the finished development to use yourself or as a rental investment, this is a good option. For example, you can refinance to a residential, buy-to-let or commercial mortgage.
• Use development exit finance. This allows you to refinance at a lower rate than your development finance loan. You can use the development exit finance to complete the final stages of your project or to give you more time to sell the development once it’s completed, possibly funding a new project at the same time.

Your situation may require a mix of these repayment methods. For example, your finished development may include multiple units and you wish to refinance some of them but sell the others.

The risks involved with development finance

Property development can be very profitable but it’s not without a lot of risks, particularly if you’re new or inexperienced in this field. You might encounter issues with planning permission, for example. Delays in the construction phase are inevitable, despite extensive planning. Costs often overrun even though detailed costings have been prepared. You may decide to change your plans partway through the project, increasing both the time needed and the costs involved. Your exit strategy may be viable when you begin your project but the property market might change by the time it’s finished, making it difficult for you to sell or refinance the property.

As such, these factors mean that taking on a development finance loan can be risky. The level of risk is determined by the size of your project, its complexity and your experience as a developer. As a result of the risk involved, the interest and fees charged for development finance are usually higher than other types of funding. You also need a contingency fund in place to cater for unexpected issues. Our development finance brokers will work closely with you to ensure that as many details as possible have been covered to mitigate the risk. This will allow you to proceed with your project knowing that every eventuality has been prepared for.

The advantages of development finance

There are many advantages to using development finance, as detailed here.

• You can take on a bigger project than you’d normally be in a position to finance.
• You can take on multiple projects at the same time.
• There are many types of development finance available, catering to different project types with varying scales and complexity. You can combine some types if needed.
• Development finance is available to new and inexperienced developers, not just those with a lot of experience and a strong track record.
• This type of funding offers flexibility as each development finance facility is specifically tailored to meet the needs of the project.
• You can begin a new development project before an existing one is sold. This ensures that you don’t miss out on a good investment opportunity.
• You can avoid having to tie up a large amount of cash in the project. This helps to maintain your cash flow until the development is sold and allows you to invest your funds elsewhere if another opportunity arises.
• As the funds are released in stages throughout the project, this maintains your cash flow.
• It increases your return on investment (ROI) as you invest less capital into the project. Although the finance costs will be deducted from the profits, you’ll benefit from a higher return on your own investment.

The disadvantages of development finance

There are also disadvantages to consider:

• The application process can be complex. Development finance lenders require a lot of information and it’s much easier to be approved for a loan if you have significant experience and a strong track record with development projects.
• Interest rates charged for development finance are usually higher than for other types of finance, such as mortgages. This is due to the increased risk for the lender.
• Various fees are also charged as well as the interest.
• Development projects are risky by nature. You may encounter an overrun on costs, delays and fluctuations in the property market, for example. This is why lenders stipulate that a contingency fund must be in place.

Get your residential or commercial project underway with development finance

Our mortgage and protection brokers are ready to find the optimum solution for your residential or commercial development finance needs. Located throughout Kent, London and Edinburgh, they can ensure that you’ve collated the right information to meet the eligibility criteria. Your application will then be tailored and the best development finance lender approached to suit your requirements.

At Trinity Finance, our brokers are highly experienced in dealing with development finance and understand that every project is unique. As such, we work with specialist lenders who can approve loans for complex projects or situations. Therefore, whether you’re a first-time developer, have an adverse credit history, need 100% funding, have a part-built development, want to embark on multiple projects or are behind schedule with a project and need to refinance, we can help you. Just give us a call on 01322 907 000 to discuss your project with one of our development finance brokers. Alternatively, send us an email at info@trinityfinance.co.uk or an enquiry via our contact form. We will reply to you as quickly as possible with more information about the property development finance options available.