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Property Development Finance: A Complete Guide

Whether you are a commercial property developer, landlord, or investor looking for finance to develop or purchase property, there are a range of options available to you.

This guide will explain the options available to you to so that you can make the best decision possible for your situation.

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How do Property Developers raise Finance?

Development finance is the term applied to the range of finance options focussed on the property sector. This includes bridging loans, development finance, commercial mortgages (including buy to let) and auction finance.

The finance in this sector is tailored towards the speed and flexibility required by developers.

Bridging Loans

Bridging Finance is intended to bridge the gap between two points, usually the sale of one property and another. These short term high interest loans are notable for the speed with which they can be arranged.

So associated with the property sector that they are sometimes called ‘development finance’, bridging loans can be the ideal solution for developers needing fast funds to secure a lucrative property or land opportunity.

Personal bridging loans are regulated by the FCA while the commercial sector is currently unregulated. This

Read our full page here on bridging loans.

Development Finance

While often used interchangeably with bridging, the term ‘development finance’ has a specific meaning of its own. While bridging is a one off loan that bridges a gap between two situations, development finance is a staged loan.

The funds are generally released in stages, as key pieces of the property development are completed.

Development finance can also be arranged for much larger sums of money than bridging, and for longer durations.

The exit strategy for a development loan is either the sale of the property or a commercial mortgage.

Commercial Mortgages

Commercial mortgages are a means for businesses to obtain finance for the acquisition of property like office or retails space, warehouses or land.

They are offered over shorter timeframes than private mortages, typically 5-10 years although the premiums are based on much longer terms.

If you’re a business wishing to purchase your own space rather than paying out significant amounts of rent, obtaining a commercial mortgage can be cost effective and offering huge flexibility.

Where a business can offer security, it’s sometimes possible to obtain a 100% mortgage but excellent credit and a solid trading history will be essential for this to be an option.

Read our full guide to commercial mortgages here.

Auction Finance

Many property investors use auction finance as a means of obtaining land and buildings at below-market rates. Specialist lenders exist via whom funds can be made available for bidding at auction.

Auction finance can be useful for developers whose equity is tied up in their property portfolio and who can demonstrate a solid track record in the industry.

It is possible to obtain finance with less experience but lenders will require additional security.

What Type of Property Development Finance Do I need?

Understand which type of finance is best suited for your situation will come from matching your project type, scope and time frame with the appropriate solution.

Short Term Refurbishment Project – A bridging loan known as a ‘refurbishment bridge’ would likely be the best solution here. This 3 to 4 month loan sometimes come with the option to be converted into a mortgage when it runs out.

Major Renovation Work – Serious work over a longer time frame would likely require either a long term bridging loan or a commercial mortgage.

Ground up Development – When a major development project is required, perhaps building from scratch upon a piece of land, development finance would be the appropriate choice.

Use Our Property Development Finance Application Checklist

While every lender has their differences, most will require the following basic information before considering funding.

  1. Details about your company and your development track record, if any. They are looking for evidence of experience and proven returns.
  2. Architectural Drawings / Detailed Development Plans with time frames
  3. Detailed breakdown of project costs
  4. Estimated Gross Development Value (GDV)
  5. Timeframes and construction schedule
  6. Details of assets and liabilities from your company, including a list of directors
  7. Several years business accounts and tax returns
  8. Exit Strategy details

How Much Can You Borrow?

How much you can borrow depends on several factors:

  • Your credit history and liabilities
  • How much security you have
  • How long you need the finance for
  • Your track record of delivering successful property development projects

Based on these you will likely be able to borrow around 50-60% of the purchase price for a new project.

Or up to 100% of the purchase price assuming that is no more than 60-70% of the gross development value.

Is it Possible to Arrange Property Development Finance Without Having Planning Permission?

Certain lenders do offer the option of borrowing before the official granting of planning permission, though it is rare.

It must be demonstrable that planning permission is formality only, and likely to occur within a measurable time frame

With bridging finance, the bridging loan lender will almost certainly reduce the borrowing LTV in this scenario.

How Does Development Finance Work?

Development loans are essential short term loans, usually over a period of between 6 and 18 months. They assist with either the purchase or refurbishments of particular projects and are usually geared in stages.

The first part of the funding is released to help with securing the property in the first place. The second stage is released to help with building and contstruction costs during the refurbishment stage. These staggered payments are termed ‘drawdowns’ and the interest is charged when each of these is made.

This type of finance often requires an Independent Monitoring Surveyor (IMS) who will oversee the building works on behalf of the lender, bringing any potential issues to their attention if he/she feels it is warranted.