A Guide to High-End Development Finance

Whether this is your first venture into property development or you’re expanding your current development portfolio. For many private and commercial developers, development finance secures short-term funding for building refurbishments, conversions, and the construction of high-value residential and commercial properties.

But what is development finance, and would my project be eligible for this avenue of lender funding?

Here at Advias, we pride ourselves on helping property developers navigate the path to the most efficient lenders on a project-by-project basis. Many of our clients will have raised development finance before, as we are constantly raising development finance we are able to bring new lenders to the table or complete the lending stack with investors or mezzanine finance solutions. We also see many frequently asked questions or pitfalls during the development finance journey, so we’ve put together a comprehensive guide to development finance and how it could work for you.

What is development finance?

You may not have heard of the term ‘development finance’ before, as it’s sometimes also labelled as ‘property development finance’ or ‘property development loans’. However, development finance essentially provides construction companies and individual property developers additional capital for projects, including;

  • New build construction
  • Property development
  • Commercial to Residential conversions
  • Heavy & light refurbishment projects

­­These short-term loans are designed to help cover the purchase and construction costs for the entirety of the building or renovation works. Often flexible, loan terms typically range from six to eighteen months, depending on the expected project schedule.

Generally, development finance loans are repaid within six months to two years from the drawdown of the loan, frequently from the proceeds of the resulting completed development sale. However, many property developers opt for refinancing to let the end development with longer-term mortgages borrowed against the resulting property value increase, this method is known as build to rent.

How does development finance work? What are the benefits?

As a property developer, development finance offers several key advantages, primarily due to the lower initial investment required. With sometimes as little as 5% of the project costs, property development funding allows you to;

  • Reduce your overall financial risk
  • Take on a larger scale, higher-value projects
  • Increase the percentage of your return on equity (ROE)

What types of development finance lending are there?

Depending on the scope of the project, types of development finance can be categorised as;

  • Ground Up Development Finance
    Typically, large-scale construction projects and new build schemes.
  • Heavy Refurbishment Finance
    Such as commercial and residential loft conversions or rear, side, and basement extension projects.
  • Light Refurbishment Finance
    Cosmetic property development, often completed with little to no structural changes, usually falls under “permitted development”.
  • Mezzanine Finance
    An equity financing tool designed to maximise the loan amount and the return on a developer’s equity investment.

How much can I borrow?

Development Finance lenders assess every loan on an individual basis; however, they tend to calculate the maximum loan value based on the following three criteria;

Day One Advance:
How much the lender is prepared to pay before the project starts? Typically, this figure is calculated at between 65% – 75% of the property value. However, the figure is capped based on the total loan to GDV lend, after 100% of the construction costs have been covered.

Loan to Cost (LTC):
How much the lender is prepared to advance in proportion to the projected build cost? Generally, this is between 80% – 90% of the total development costs.

Loan to Gross Development Value (GDV):
This is the lender’s loan ceiling in proportion to the final project value. Most lenders offer between 60% – 75% of GDV.

For more information, Advias’ Development Loan Calculator app can help you crunch some numbers.

Can I get 100% development finance?

Yes… although not all lenders are prepared to lend 100% development finance, there are a select few institutions that typically offer two alternative solutions.

These include securing the loan against additional assets or the owned land value or entering a partnership with a Joint Venture Investor where the profits from the property sale are usually shared.

If you’re looking for 100% development finance, speak to Advias today about which of our partnered lenders are best suited to your loan requirements.

When should I apply?

It is generally best to submit development finance applications when planning permission is granted and you have all your construction figures ready, this includes your preliminary costings, potential CIL costs, professional fees etc. Lenders’ requirements can sometimes be subject to additional information requests, which can delay application approval. Advias works with you to ensure a full pack is sent to the lender on application to reduce delays.

How long does a development finance loan application take?

Typically, a loan application takes around 4 to 8 weeks. However, give Advias a call on +44 (0)207 082 5777, as we can often fast-track applications for more urgent applications.

How are the funds released?

Development finance funds are released in stages, often in accordance with the ‘schedule of works’ as declared in the loan application. As a developer, quick access to initial loan funding can be made within 48 hours of approval, which is usually used to secure the purchase of the land or site.

After the initial payment, development finance lenders will release the remaining funds in stages to cover construction costs. These are often subject to lenders’ checks, with the aid of a monitoring surveyor to ensure the project spend and schedule remain aligned.

Does development finance require planning permission approval?

Property development loans usually are only available for projects with full planning permission; however, by speaking with an Advias broker today, you may still be able to apply if planning permission is pending.

What are the development finance costs and charges?

  • Interest payments: Rates typically start at 4.5%; however, projects with a higher Loan to Gross Development Value (GDV) tend to pay interest at between 6% – 10%.
  • Arrangement fees: Lenders can charge a fee of between 1% – 3% of the loan amount.
  • Valuation fees: This covers the cost of a certified surveyor required throughout the project to assess the site and project value (although surveyors are primarily used at the start and the end of the loan term).
  • Quantity/ Monitoring Surveyor fees: Lenders will employ a QS or Monitoring Surveyor to establish a drawdown schedule and attend the site periodically to observe the progress of constructions and costs.
  • Legal fees: Solicitors are required the handle the legal elements of the loan agreement for both parties.
  • Non-Utilisation fees: These fees are not always applicable; however, lenders can levy charges against the balance of funds not yet drawn down.
  • Drawdown fees: This applies to the charges lenders implement at each stage of funds being released.
  • Exit fees: Usually applied at the end of the term and paid from the sale proceeds or by refinancing. These are calculated as a percentage of the gross development value or the loan amount.
  • Broker fees: Only due upon the completion of a successful loan application; typically, this is between 1% – 3% of the loan amount.

Can I apply with a poor credit rating?

Yes. Although many development finance lenders will not provide development finance loans to applicants with CCJ’s or a history of missed payments or defaults. Here at Advias, we can introduce you to lenders prepared to help finance applicants with past adverse credit histories.

If you’re seeking advice about a commercial or high-end residential development finance loan, speak to one of the team here at Advias. Partnered with over 170 specialist lenders and private banks, we will direct you towards lending streams unavailable through high street banks and other broker services.

Our focus is to navigate and secure the development finance terms that help reduce your costs, maximise profits and provide the required timescales to achieve this.

Reach out to Advias today on +44 (0)207 082 5777, or email us at info@advias.co.uk

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