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What is development finance
Property development finance can take numerous forms but all are used by developers to fund construction projects of varying degrees from light through to ground-up builds. The loan facility is constructed over a short term period typically from 3 months through to 24 months with the lender making payment either m monthly or sometimes tied into key milestones of the development. Exit strategies for development loans can vary slightly but typically they are either paid upon sale of the property or refinanced once the project in question has completed.
How do you qualify for development funding
There are hundreds of different development loans on the open market cover an extremely wide range of offerings from terms, base rate fees and scope of projects. A lender’s eligibility criteria will come down to numerous factors but the key area of concern to an underwriter apart from the loan amount terms will be the property/land location, the capital that the lender is putting into project themselves and their experience level. While there are a number of contributing factor these are key areas that help to structure the agreement in principle that an underwriter will be able to present to the lender which will include their terms and the rate at which they are able to facilitate the property development loan.
Who would want to use development finance
– lenders looking to develop a property, both new and experienced developers can apply
– Lenders buying a property at auction which require renovation
– Developers who are renovating a property and need to refinance
– Developers changing the use of a property i.e. changing offices into a residential property
What are the different types of development finance projects
One of the most straight forward forms of projects for this funding type a light refurbishment can typically consists of make aesthetic changes to a property which can include purely superficial changes such as works on flooring, ceiling interior and exterior walls.
The next level up on the property development scale this can include such renovation works as internal wall movement, electrical work, central heating work, heavy duty external land scaping and creation of new self contain rooms.
This goes past puely asthetic renovations and involves full-scale re-development of internal rooms, the building of extensions, loft conversions and even partial demolition of the existing property.
This constitutes a complete development build from the ground up from footings all the way through to completing the build structure to include all key ancillary attributes to be able to pass planning laws to meet required standard to be deemed habitual or eligible for sale on the open market.
How Property Development Finance Works
In practice when lenders are looking for property development loans they are looking to fund the construction or works of the development but the reality is that a lot of lenders are also looking to fund the purchase of the property. As such the funding required is typically being used for both works and purchase and the rate received will be based on the above previously mentioned factors. Then based on the type of project the lender is looking to undertake this will determine the type of development loan they will look to secure for instance a light to medium refurbishment loan might see the lender seek a ‘refurbishment bridge’ type facility which will see the lender complete the renovations work over a set period of time with the loan then switching to a mortgage later. This could be an option for a person looking for a regulated loan i.e. with the view to live in the property once finish.
For a heavy to ground-up development the lender could look to secure a more typical type of development loan which would part purchase the property and also fund a good percentage of the construction cost. So an example might be the lender has purchased a property at auction paid the deposit and they now need the funds to complete the purchase, the purchase part of the loan would take care of this and then based on the agreement of the facility they will have a set day one drawdown that they will have in place to start the construction. Following this, the lender will then have the remaining amount of development fund released in either staged payments of development tranches when they have hit key build milestones.
In order to be able to ascertain your funds for drawdown the underwriter will measure all of your assets review your projections, take into account any relevant planning has been approved, as previously stated they will take your experience into account. For new inexperienced developers assigning a project manager and a reputable construction company can be a measure taken to ensure that a deal is agreed and also can be important to securing an improved rate. While a number of lending providers may refuse inexperienced developers Mint Bridging are renowned within the industry for their ability to work with them and to provide project managers with the ability to help and guide junior developers.
Example of a development loan costing
In this scenario we layout the example of a development loan and how this would work out in the overall costings. In this situation, if the developer bought a rundown 6-bed period property and received planning permission to convert it into a 10 bedroom HMO. In this scenario, if they had secured the property already and needed £600,000 to complete the development. Mint Bridging would provide the development loan over an agreed period of 12 months at a rate of o.7%, with the development taking 8 months to complete with an additional 4 months built into the facility so that they had time to sell the property as this was their exit.
Mint Bridging would apply a monthly charge to the loan but let assume they completed the development in month 8 and then it took them 1 month to sell we still would not charge any early exit fees, meaning that we only took our interests for the months that the facility was in place.
|Site Total Value||£400,000|
|Development costs (released in tranches)||£600,000|
|Gross loan amount over 9 months||£606,389|
|Completed Valuation||£1.7 Million|
|Total Development Profit||£993,611|
Why Do Lenders Need Their Own Capital With A Development Loan?
One of the main reasons from the funder’s perspective is that it provides security to the overall facility and allows underwriters to attribute the rates to the lender based on the degree of funds they are investing into the project personally. Naturally the more the developer puts into the facility themselves either in the form of cash and/or security the better the terms they will be able to secure. From the lenders perspective by taking a development loan they are not having to fully fund a project thus free up a percentage of their own capital should they be looking to invest in more than one project also it means they are tying up less capital and as such have more liquidity readily available.
How is development finance different from bridging finance?
One of the key difference is the way in which lenders repay the loan, with development loans as mentioned above this is paid monthly and/or tied into construction milestones. With bridging finance on the other hand this is repaid at the end of the term in a one-off payment. In both cases the lender needs to pay close attention to the terms of the agreement as some lenders will tie early exit fees to a loan so even if you don’t require the loan for the entirety of the term you will still have to pay the full completion fees. This is where Mint Bridging can help whether you need a bridging or development loan we work with our developers to ensure that the vast majority of our facilities don’t include an early exit fee.
How is a development loan different from an auction loan?
Auction finance typically requires a lender on having successfully won at auction to have the property bought within 28 days, this can be deemed as a short time scale something that development finance is not always known to be. Essentially the lender is looking for quick finance from a lender who can fund both pre and post auction as such you would typically be looking for a bridge loan. This can be the funding of choice for experienced developers as they will be used to working to short time frames when looking to refinance or fund the works themselves. A development loan, on the other hand, provides a slower route to drawdown which can include valuations, asset managers and a more intensive underwriting process, hence why auction finance for purchase favors experienced developers. However, it is worth noting that a company like Mint Bridging
What are the advantages of property development finance?
– One of the main reasons adhered to in a previous point is that this type of funding allows developers to retain a certain amount of liquidity as they are not required to put in as much capital into a project directly. While there are a very small number of lender who will provide a 100% loan the reality is that this will come at an extremely high rate compared and will require significant collateral, conditions and even guarantors. While this can seem attractive acquiring terms to meet a developer’s needs of fast finance at a great rate are far more achievable by providing a percentage of collateral against the property development loan. Conversely, the more funds/security you invest into the facility can produce far greater terms let alone a great rate, what you can find is the additional benefits make the loan far more attractive to developers. For example at Mint Bridging depending on the level of security that you invest into the loan you can secure development finance with no need for a valuation, no guarantors, funding delivered in days not weeks +more.
– Development scope can increase when using this type of property loan. When self-funding a project you can find finances restricted and your development threshold is set at a certain level due to budgetary constraints. However by working with a loan provider who could be funding anywhere from 75%, 85% or higher than naturally with a greatly reduced initial outlay then the level of project that is taken on can be far greater than self-funding.
– Improve Project ROI; due to the level of capital you will be putting in and your ability to leverage against this, yes it’s true that your overall profitability will be slightly affected due to the payments you will be paying for the facility but this is significantly outweighed by the reduced funds you will be using to secure the development thus leading to a greater return on investment on the reduced initial capital laid out.
– Experienced assistance is another substantial benefit that can be provided by some lenders. Mint Bridging, in particular, is renowned within the industry for providing excellent portfolio managers which provide support for the developer from the start to the end of their project. This can be particularly beneficial to new developers who are new to the lifecycle of a development project and can find themselves with milestones overrunning or finding build costs spiraling. This is just one of the many reasons why Mint Bridging recently won an award at the “What Mortgage Awards 2019”.
What are the restrictions to apply for development finance?
Typically security is a big concern for lenders so having a degree of capital in place to secure against the proposed purchase is very important. Also as previously mentioned experience can be a determining factor. Another substantial area that will need to be addressed prior to the application is planning permission. Looking for a facility on a property to development without planning agreed is not the recommended course of action, a lender may still take a view to have the loan in principle in place should the
How long does it take to apply for a development loan?
The application process can be done very swiftly, with a soft application even able to be done online with a number of providers. For example, you can do a soft application for development finance online with a number of key questions being answered and typically you could receive a deal in principle within 24 hours. Mint Bridging are particularly proud of their response time with the vast majority of development enquiries being returned to the applicant within 90 minutes. When we receive a development enquiry all our applicant will only ever receive a soft credit check with no implications to their credit score.
How long does it take to receive development funding?
Where as the application process highlighted above can be done swiftly to produce a deal in principle if this is then accepted by the applicant then further formalities will need to be undertaken before the loan facility can move to drawdown. The length of this process will be down to numerous factors, in particular, the level of security provided by the developer may determine if they need a valuation on the property being purchased or not, also have they got their legal representative in place and are they fully abreast of their deal with the lender, what security is being used and does this also need to be valued. With these factors taken into consideration then an efficient drawdown process can be delivered in as little as 10 working days however if there are numerous securities involved in the deal and if third parties involved are inefficient then the funding can run into the months. Thus developers should look to provide as much transparency as possible to the lender and have legal representatives in place to ensure an efficient drawdown process.
Why should I use Mint Bridging for my development loan?
Development loans from Mint Bridging come without the vast array of restrictions that you could be subject to from other lenders.
– One of our key market offerings is that we are open to developers of all experience levels
– We provide development finance from £50,000 through to £5M
– We can build loans tailored to your needs which can be constructed around 1st and 2nd charges to provide flexibility to ensure you get an loan to meet your needs.
– We can fund up to 80%* of the project costs
– The vast majority of loans don’t include early exit fees
– We can work fast to ensure that a development loan can be in place to secure a property
– Specialist portfolio managers are assigned to all cases to ensure your project can benefit from experienced assistance
– We work with developer to provide a schedule of drawdowns that benefit their project timescales
– Increased day one drawdowns can be applied to ensure greater initial working capital is available is needed.
– All money is provided direct from Mint Bridging to substantially cut red tape, we are the lender
How Much Will A Development Loan Cost
Unlike a bridging loan, a development loan does present an ongoing monthly cost, as the repayments will need to be budgeted for every month. As highlighted within the example above this will have a direct result on the profits, charges can be offset by taking on a larger project or multiple projects. As noted earlier in this article one of the benefits of utilising development loans is the ability to keep a degree of your capital back, which can then allow developers to have more than one project running at once.
How is a development loan monitored
Your lender will require regular site updates to ensure that the development is on track and is adhering to the schedule of works outlined when the loan facility would have been approved. This is particularly important as the development will have key milestones built into this schedule of works and it is these milestones which when achieved will release further tranches of the development loan for ongoing construction costs. This is a safeguard for the lender to ensure that the developer is keeping to their obligations, to further ensure the tranches can be securely released the lender will send out a quantity surveyor prior to the release of funds, this can be an internal qualified member of the company or a third party surveyor will undertake an assessment on behalf of the lender.
Do you need a development loan?
Contact Mint Bridging today to discuss your development loan needs on 0161 710 2006 we have underwriters on standby to discuss your case. We can review your needs to explain all your available options from our wide-ranging development funding to discover personalised loans tailored to your needs. We provide some of the most flexible terms and competitive rates on the UK market regardless of experiences, project size and required drawdown time frames. Our funding solutions come directly from Mint Bridging we are the lender meaning we can save you more on fees.
You can contact Mint bridging direct over the phone, via email or by completing an online eligibility check, then once we have your development loan requirements we can begin the application process.
The majority of lenders will require a certain degree of proof of income when looking to secure funding and Mint Bridging is no different (this can vary from lender to lender). Typically the structuring of development loans sees the applicant paying a monthly fixed amount. Should the project complete and the exit be fulfilled sooner than the completion date then the lender will have to complete the outstanding facility and interests up until this point in the loan?
It is in such an instance that the developer will have to have paid close attention when setting up the facility as lenders can charge early exit fees. Mint Bridging in the vast majority of cases will not charge early exit fees, but this is not the case for all lenders.
At Mint Bridging we work within a budget of £50,000 to £5M for our development loan offerings. But there are lenders that will borrow from as low as £10,000 right through to £100M.
The vast majority of development loans do not have early exit fees applied to them as this is one of the key benefits of taking out such a loan with Mint Bridging. However, of this is applied it will be explained clearly at the outset of the agreement in principle.
Given the amount of due-diligence done the lender and also possibly the broker if one was involved the most important aspect which will have been covered of first is how do you expect to repay the loan and within what time frame. Failure to meet clear guidelines set by the lender on this will mean the development finance would fail.
If the sale of a property is the expected method of exit then it is very common that after the statement of works the lender and borrower would leave a small amount to fo time which they agree on within the loan 1-3 months whatever the case may be in order to have ample time for the property to be sold.
If they list refinance then numerous due-diligence checks will be done by the lender to ensure the client will be able to retain a good credit rating in order for this to be secured at the end of the agreement.
At Mint Bridging we stay in regular contact with our borrowers so that if an exit is looking unlikely 1,2,3 months prior to the end of the agreement then we can begin to put safety measures and put recommendations in place to ensure either the loan is complete or an extension can be granted (but this will be based on numerous factors being met).
This is where getting your time scales correctly is vital to the profitability of your project; by working with Mint Bridging we can assist borrowers at every stage of the funding and development process to ensure their projects goals have an increased degree of success compared to our competitors.
If a lender senses they are going to exceed their completion date then they will need to either apply for an extension as not to go into default or to refinance with another lender. Now it is up to the lender whether they grant additional funding within the extension and if they also actually grant the extension. This can come down to the amount of equity that has built up within the property being developed and also if you are open to adding more security to the loan.
Certain development loan lenders can arrange a second charge development loan by securing their interest by way of an “equitable charge”. An equitable charge still fully secures the development loan lender but importantly does not require the authority or permission from the first charge lender prior to entry onto the land registry documentation.
The short answer is yes as at the forefront of most lender decisions is the security being put up for the development loan. However, more ethical lenders like Mint Bridging may ask a few additional questions at the application stage just to ensure that the lender can securely meet their security needs and timescales obligations.
They can be secured against a residential property, commercial property as well as land and building plots. What can also be advantageous is that if the lender contribution with the applied second charge does not meet the lender’s requirement, lenders may look to combine multiple assets together within the second charge in order to meet the minimum requirement of the development facility.
While this is not an initial refusal for a development loan there are many solutions available if the lender has previously had financial constraints, gone into default or previously been declared bankrupt. The lender will naturally need to be able to supply evidence of their security and also be prepared to be asked additional questions if required around previous defaults.
While on the surface both these forms of finance can appear to be the same due to both being associated with short term funding and being also heavily utilised within the property development sector.
With a bridging loan once the development has finished then refinancing in order to repay the bridge is undertaken by arranging a mortgage over a longer period of time is done or the property will be sold.
With development finance these tend to be taken out over a longer period of time, also the way in which the loan is structured is different due to funding being released at key development points of a project. Also, greater emphasis may be placed on the borrower and there experience within the sector.
This is a method of finance for development projects which are generally used for projects which are being built from the ground up. The majority of the finance for the development will be from a primary lender with the remaining funds being made up vis the developer and the mezzanine lender who will take a second charge for security.
We personally do not ask for any application costs but should you be accepted then dependent on the deal in principle offered you could pay between 1-2%. This is however only payable once you have accepted the development loan and funds have been deposited.
There can be additional cost attributed to valuations of properties at various stages of the development. Mint Bridging also include portfolio managers within the facility to assist in the loan delivery and customer care management throughout the lifetime of the loan.
We may also include a contingency loan within the facility this is additional finance that can be called upon should a certain circumstance arise that cause the loan completion date to be exceeded. No additional charges are added for this and also lenders are not forced to use this funding it is added as a safeguard for our lenders.
While all companies handle the clients differently at Mint Bridging once you have been onboarded you will have been already introduced to your underwriter, likewise, your portfolio manager who will be your point of contact going forward will have liaised with you regarding valuations, statements of work and much more. The portfolio manager is an invaluable asset who can provide experience to aid in meeting your goals and time schedules for your projects delivery.