What is Development Finance?

November 30, 2020
Construction Worker

What is Development Finance?

Development Finance is a form of Alternative Business Funding that provides an injection of cash to cover the cost of both the purchasing of land, as well as the costs of building the property.  There are multiple different forms of Development Finance, such as:

Residential Property Development

Commercial Property Development

Renovations & Refurbishments

New Builds (also known as ground-up development)

Mezzanine Development Finance

 

Ground-up Development Projects

Development Finance is used to finance the costs of building brand-new property. These costs include such things as the land costs (which can be up to 70% funded) and the building costs (which can be up to 100% funded). It is important to note that the loan amount cannot exceed 70% of the total gross development value.

These types of facilities can vary largely in the total sum. For larger projects, seven figure sums can be funded for land and building costs. This will work similarly to a Bridging Loan, where a sum of money will be funded to the client, to be spent on developing property. This will then be sold on for a profit, and the capital of the loan will be paid back, plus interest.

For example, if you purchase a plot of land for £200,00 and plan to build 5 houses upon it, a ground-up facility could suit your venture. 

With an estimated value of £200,000 per property, and a build cost of £100,000 per property, each house built and sold will generate £100,00 profit. The difficulty in this is acquiring the starting funds to build the property. This is where a facility can be put in place and cover this cost. 

£200,000 for the land purchase + £500,000 (£100,000 x 5 houses) would equal a total cost of £700,000 for the build. After sales of £200,000 per property, you would have a total of £1,000,000 (£200,000 x 5 houses), leaving you with a £300,000 profit. 

Development Finance can raise up to 70% of your land purchase, and the total build cost, which would be paid out to you in stages as the build progresses. This will be repaid with interest, but will still leave large profits in the hands of your business. 

How much can I borrow?

With a Development Finance facility, you can cover the cost of:

Land Purchases

Development & Restoration costs

Lender Fees - Arrangement fees, Exit fees etc.

Professional costs - Solicitors, Surveyors etc.

The value of your loan can be up to as high as 70% of your land costs and 100% of your expenses in building. This can cover a large portion of your total costs in your venture, providing the fact that the total loan amount does not exceed 70% of your total gross development value.

Typical facilities that are put in will have slightly lower up-front amounts, as a 70% land value, and 100% build cost forwarded is the highest known amount. This is possible, although it will come with higher entry criteria, and higher premiums. 

Payments will be funded in stages throughout your project. 

An initial payment will be made in order to cover the costs of purchasing the land with planning permissions for building upon

Staged payments will then be paid to you in order to cover the costs of building as the process moves forward.

How will I repay the borrowings?

The typical option for a bridging/development finance loan is that once the build has been completed, the property will be sold on for a profit, and the originally borrowed funds will be repaid subject to interest. 

In the modern financial landscape, there are other options available:

The funds can be refinanced through an exit product. This will enable you to clear the original loan, and allow you to extend your repayment period until all the property is sold. 

Long term refinancing is also an option. If you prefer to keep hold of the capital after sale of your developments, you can refinance your total borrowings to allow for a longer repayment period. An interest payment will be added to the total of your capital and interest from the original borrowings. 

Mezzanine Finance 

Mezzanine Finance works very similarly to other Development Finance options. The primary lender will fund 70% of the Gross development value, leaving 30% to be funded by the developer. 30% can still be a large amount of money, which may hinder your business progress. A mezzanine funder can step in and cover a further 20% of your total.

The typical cost for this, will work by the funder than taking a larger percentage of the profits.

For example if your total costs equal £500,000 and the mezzanine funder covers ⅕ of the cost, they may ask for ¼ of the sale cost. This gives them their incentive to invest, as well as helping you to acquire your remaining profits.


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