Development finance provides established property developers with the flexible and affordable funding needed to get their most ambitious projects off the ground. But who exactly is development finance suitable for, and how does it work?
What is Development Finance?
Development finance is a specialist type of secured loan, issued strictly over the short term and exclusively for property developments. Loan terms vary from six months to two years, after which the full balance is repayable in the form of a single lump-sum payment.
Unlike conventional bridging loans, development finance is typically issued exclusively to experienced developers with an established track record. All agreements are bespoke, with flexible terms and conditions to suit the exact requirements of the borrower.
How Does Development Finance Work?
All development finance agreements are unique, but the basic logistics remain the same from one product to the next. A basic overview of how development finance works is as follows:
- The property developer submits an application, complete with a formal valuation of the property in its current state, an estimate of its value upon completion, all project costs, and an estimated deadline for completion of the project.
- Due diligence is then performed by the lender, including a detailed background check on the applicant and their financial track record. A detailed credit history search will also be conducted, and the applicant’s experience in the field will be considered.
- If the lender is satisfied that the applicant meets their eligibility requirements, they will make an initial offer. At this point, all essential terms, conditions, and repayment requirements will also be disclosed.
- The applicant then studies the lender’s offer and ensures they are happy with the terms and conditions laid out. The agreement is signed, and the first loan installment is transferred into their account.
- The remaining balance is then transferred over a series of stages, tied with the completion of specific phases of the project (overseen by the lender).
- Interest accrues on a monthly basis (typically around 0.5%), and the full outstanding balance is repaid in a single lump sum on an agreed date, six to 24 months later.
The developer will usually have the option of repaying the interest on the loan on a monthly basis, or ‘rolling up’ all interest into the final balance of the loan.
How Much Can I Borrow with Development Finance?
Maximum development finance loan values are tied to the projected value of the development upon completion and the financial status (and background) of the developer.
Most lenders cap their development finance loans to a maximum LTV of 80%, but it is possible to ‘top up the remaining 20% with mezzanine finance. This provides developers with the opportunity to cover 100% of all project costs externally without having to tie up their own on-hand capital.
What Documentation is Needed to Apply for Development Finance?
Your broker will help you collate the documentation and evidence needed to support your application and will pair you with an appropriate lender to suit your needs.
Examples of key documents needed when applying for development finance include the following:
- Detailed evidence of the property or development’s current value
- An accurate estimate of its future value upon completion
- Comprehensive details of all construction, renovation, and development costs
- An approximate timescale for completion of the project
- Evidence of an established track record in similar development projects
- Copies of planning permission and any other permits required
- Proof of due diligence and effective contingency planning
- Details of all other contractors and contributors involved in the project
You will also need to show your lender that you have a robust and reliable exit strategy, indicating when and how you will repay the full outstanding balance.
