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Chris Bell

Understanding property development finance



There are a number of different forms of financing options available for property developers. These are typically made available to experienced development companies, smaller properties who have at least a small number of “out of the ground” projects to their name or, alternatively, individuals who have worked (or are still working) in the construction industry and are looking to begin a project they can call their own.

With a proven track record, finding finance for this type of business or individual is relatively straightforward assuming that the funding required is appropriate to the development proposal plan.

Lenders for property development projects typically fall into one of three categories.

Tier 1

Tier 1 lenders can help you if the funding requirement is in the region of 60-65% of costs and no more than 50-55% of the gross development value – otherwise as GDV.

Tier 2

Tier 2 lenders may come into play in the event that the funding requirements for a project are higher and a developer requires up to 60% of the land purchase price and 100% of the development costs, assuming that total borrowing is no more than 65% of GDV.

Tier 3

If finance is required up to 80% of costs but no more than 65% of GDV, a tier 3 lender may be able to help. The interest rate on this type of mortgage is typically much higher than those offered by tier 1 lenders and may also include arrangement fees.

What about those with no experience in property development?

Of course, every property developer has to start somewhere. Once planning permission on land that a property developer owns has been secured, a new developer is ready to get finance in place.

In order to get the approval of a lender a robust development plan is required. Lenders will also want to see that an experienced team of contractors are in place to take on the build and management of the project.

As is to be expected, lenders will charge higher rates for this type of mortgage where the risk is perceived to be greater.

Project monitoring

While the experience and expertise of a developer can vary greatly, lenders will often require an independent monitoring surveyor (IMS) no matter how many projects a developer has undertaken in the past. At each stage of a development the IMS will come in to inspect progress and ensure that the project is progressing on budget and that the lender can comfortably release funds for the developer to draw down each tranche.

In some instances, the cost of an IMS can add significant costs to a project and so it is often preferable for smaller developers to consider lenders who are happy for progress to be reported via the certification of the developer’s own architect.

Although it is impossible to give exact time frames on securing finance, a six week turnaround is considered the standard. Within this there are a number of variables that can accelerate or slow the process. Typically the most labour intensive and time consuming factor is putting together paperwork in the best format for a lender.

Once the application goes to the lender, the project needs to be valued, underwritten and processed through the IMS and legals. Once this is completed and everything is found to be satisfactory, the first tranche of funds will be released.

Property development bridging finance

If you are looking to access property development finance, seeking expert advice can help to streamline the process and get a project off the ground in the shortest possible timeframe. Should you find that a property development bridging loan is required to assist with the conversion or refurbishment of a project, it is particularly important to seek the right advice.

The advantage of this type of bridging loan is that the finance can usually be secured quickly and efficiently.