Understanding Property Development Finance and How to Find a Loan

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For property developers in the UK finding and securing a potential development site can be quite a challenge with high competition for the best deals.  Of course, once the development site has been found and the acquisition deal agreed, finding funding is the next step.

Traditionally, property developers have three means by which to explore potential finance for their proposed project.  Approaching an existing or previous lender can be a good start but may not necessarily be representative of the best overall rate of interest.  Searching the marketplace and speaking to new banks is a good way of finding competitive rates but, with hundreds of loan products available, can be hugely time consuming.  The third option is to approach a specialist property development finance broker such as www.developermoneymarket.com.  A broker’s role is to know the market, what’s new, who’s got appetite to lend and what types of lending is available.

What is Property Development Finance?

Development finance is usually a short-term loan provided to developers to fund a property project.  Such projects may include the refurbishment of an existing building, a conversion of a former commercial property into residential or a new build from the ground up.  

There are many dozens of property development lenders whom, as part of their development finance terms, secure their loan against the land being lent against as well as further guarantees.  Development finance terms will vary depending upon the type of lending product and these include the following key types; senior development, stretch senior, mezzanine and bridging loans.  Of course, there are other property development finance structures, but these represent the most common.

How Do Development Finance Terms Vary?

Lenders will determine their development loan terms based upon the funding risk they are taking on a particular deal.  As an example, where a lender is providing a senior development loan at say, 65% loan to cost, they will have first charge level security and their development terms will be single digit, perhaps 7%p.a.  However, when this loan to cost is as high as say, 90%, then accordingly the lenders development finance terms may range anywhere from 8%p.a. to 21%p.a.

Where a property developer does not have the liquidity to put in a large amount of equity, there are finance structures that can assist.  A mezzanine loan can provide additional equity that will help a developer secure a senior development loan.  Mezzanine finance terms can be high with rates as much as 24%p.a. which reflects higher lender risk.

Many peer-to-peer lenders will also set their loan terms depending upon their overall appetite for a project. This will be affected by the geographical location of the project, the type and size of the development as well as the perceived ability of the developer to successfully complete it. 

There can be some ‘devil in the detail’ with property development finance and so it is always carefully going through heads of terms with a specialist finance broker.

Key Lender Criteria

Each property development lender will set criteria which will represent their appetite for types of projects and the related risks.  These criteria can be wide ranging but will include a maximum loan to total costs (LTC), a maximum loan to value (LTV), minimum and maximum loan sizes, minimum net and gross profit levels, 

What do lenders want to know?

Lenders will want to understand the developers experience and see a detailed track record demonstrating their ability to complete a project on time and on budget.  Borrowers should be prepared to list their most recent property developments with details of the costs, loans secured, whom the previous lender or lenders were, details of the schedule and exit success.  This track record will be backed up by presenting company accounts.

Having an established professional team and contractor onboard will also help reassure a lender of the developer’s ability to complete a project successfully.  

Having limited or no previous development track record is not necessarily going to prohibit getting finance, but the lender may impose other criteria.  These additional requirements may include higher equity contributions and additional security.

Being able to demonstrate the exit strategy, in other words how the loan will be repaid, will be crucial to getting the lenders support.  Having an analysis of local comparable sales, potential competition and a detailed marketing plan will help gain confidence in your exit plan.

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