Property development for larger scale projects is all about having a vision.
It’s about understanding the market and turning that vision into a reality, yet often developers and investors have problems getting the finance right especially in this market, knowing what products are available and which lenders to use can be a major issue.
Simon Allen from Total Business Finance has the expertise, contacts and resources to help you finance your next property working with some of the most forward thinking lenders in the industry.
Back to that in a minute.
But why would you want to use development finance? It’s quite simple. For the purpose of building a new property or converting a barn for example.
Background
Pre crunch a bank would give you 70% of land and build costs, you would get the properties built and then enjoy the rewards. Some even gave you 100%!
The rest is history as development finance from the banks disappeared overnight. Now almost seven years later there is more choice although the rules have changed. You definitely need experience in development to gain access to the widest choice of lenders. Although for the right project and with a strong professional team then for a beginner it may be available.
Options
Depending on the profit within the project (most lenders want a minimum of 20% on costs), if the land comes in with no debt then they will normally provide 100% of the build costs, professional fees and interest. A contribution will also be made to the land if the profit is high enough.
The two main areas to look at are the loan requested compared to the total costs (LTC) and the end sales value (known as GDV-Gross Development Value).
Lenders work off a maximum GDV of 55%-65% and then want a cash contribution of 15%-50% of the total costs.
The main providers of development finance are:
Banks
Most are shut for new clients and the ones that are open don’t necessary publish it. Experience is essential and your contribution can typically be up to 50% of costs. Lenders are very slow so opportunities may be lost. Rates tend to be 4%-6% per annum over base rate with set up fees of 2% of the amount borrowed and some will also charge a fee based on the loan or end sales value.
Loan amounts tend to start at £500,000 so for first time developers or smaller projects this may not be an option.
Specialist property lenders
Experience is essential. Rates tend be higher up to 10% with fees of 2% on set up and exit and a focus on the south east or affluent areas. There has to be a proven sales market in the area although lenders are typically quicker than the banks.
They tend to work off 55%-65% GDV. The more experience you have and the better the project will dictate what you get.
Again to get access to all the lenders £500,000 minimum loan but lower figures can be available for the right client.
Bridging lenders/short term lenders/private lenders
Rates are higher with a typical rate of 1.45% per month and deals can be agreed and paid out very quickly. Set up fees are usually 2% and fees are not taken on exit. There are also many variations of this although most lenders want a return of 16%-20% over a twelve month period.
Again looking at 55%-65% of GDV but these lenders want to lend rather than looking for reasons not to.
If the loan is structured right costs can be very competitive as with most lenders you only pay interest when you need the money and no exit fees can save you thousands. Minimum loan is £100,000.
JV Partners
Whether a private individual or a small number of lenders who will provide all the finance. We even have lenders who lend to developers who have been made bankrupt in the past. Interest will be charged on the amount borrowed and then a percentage will be taken on the overall profits.
Peer to Peer lending
Very new in the market and a big announcement due from one of the lenders which will bring the costs right down and be a real threat to the banks and bridging lenders.
At the moment looking at 85% of costs as long as it does not exceed 65% of GDV. Costs vary from 20% per annum upwards. But this will reduce very soon
Mezzanine Funders
This can be a lender or individual and reduces the amount of money you have to put in. They will though want a higher return on their money for the additional risk.
Repayment
If you don’t have pre sales and if you are building to sell then the length of the loan is crucial. Ideally 12 months or six months on top of the build time to sell them on the open market.
If you want to keep what you build, there are mortgage options at 80% although costs are lower at 75% and 70% LTV. On average it takes 8-10 weeks to complete so be aware of this if you need to repay your development loan by a deadline.
Conclusion
Many options are available and land can be funded with and without planning. Like all finance money is available for most projects but with very different interest rates, criteria and loan to values. The above are examples and rates may be better depending on experience, location and demand. So dust off your boots and your high vis jacket and get building.
To discuss a project all I need is:
- Details of experience
- Breakdown of costs and end values
- Planning Reference
| Simon Allen Director Total Business Finance (UK) Ltd | |
| T: 01565 654005 | M: 07919 060063 F: 01565 337506 Email: [email protected] | Web: www.tbfinance.co.uk
Address: Booths Hall Chelford RoadKnutsford Cheshire WA16 8GS |
