What is Development finance?

Most people have never heard of Development Finance. This kind of funding has been historically hard to access, with minimum loan amounts of £1m and above available only for experienced Developers. In the recent period, we have seen some Lenders start to compete in the £500k-£1m range, and there is even now a handful who will deal with cases below the half-million mark.

When you get a mortgage, you are borrowing against the value of a property in its current condition. For example, if you had a house worth £100k, you may lend £75k against it. If things go wrong, the Lender has a charge on that property and can repossess it. Development Finance is different; this loan is based on both what property the property is worth now and what it will be worth once it has been built/refurbished. This means you can lend both money for the purchase and up to 100% of the build costs. Lenders will lend in two portions or ‘tranches’:

• A portion for the purchase. This will be based on a percentage of the current value, much like a bridging loan. This would be funded on purchase.
• A portion for up to 100% of the build costs. This portion is based on what the property will be worth once Developed. This portion is released in stages the build completes. This is the part the really sets Development Finance apart.

The Development Finance world is quite different to other areas of property finance. Buy to Let mortgages may have standard products and criteria, in Development Finance each deal is bespoke, and manually assessed based on its merits and overall risk profile.

Experience is very important. The Lender needs to feel comfortable that you can turn the property from what it is now into the completed development. A good professional team, clean credit history and a strong asset balance all help. Most lenders will ask that you have completed several projects before. However, you can now access finance as a first-time developer.

Another major consideration is your proposed exit, Development Finance is a short-term solution to get the property built. Once finished the Lender will want to know you can either sell or remortgage onto a Buy to Let.

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Fee Structure

Every Development deal is bespoke; the cost and kind of fees charged by the Lender can vary from case to case. The standard fees charged are:

• Interest Rate
• Arrangement fee (or ‘in’ fee) – this can be a percentage or loan amount or of GDV
• Exit Fee (or ‘out’ fee) – this can be a percentage or loan amount or of GDV
• Legal Fees
• Valuation Fee
• Monitoring/Quantity surveyor fees for the drawdown of build funds

What other Items should I budget for?

There can be a variety of costs depending on the development, architects, environmental reports, project managers. The devil is in the detail - each site is different.

The Process

As Development Finance is bespoke, the process and timescales can vary from case to chase. However, there are generally a few key stages:

• After initial conversations, we can reach out to Lenders with the fundamental details. If comfortable those Lenders will then quote provisional terms
• Next, we can proceed to full application, supplying the full range of documents and a Development Proposal. If happy, the Lender will then instruct the valuation
• If the valuation comes back as expected and the Lender is happy, the Offer will be issued and legal works begin
• The Solicitors will then complete their duties and set a completion date.
• Once the purchase of the site completes, the process does not stop! The Lender will usually release build costs in stages, each time checking funds have are being spent as expected and that the build is going to plan.
• Lastly, once the build is complete, it is time to get the sales or remortgages done. The Development Finance Lender is paid from these proceeds, and the transaction has concluded.

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Valuation

The valuation of development finance cases is a key part of the process. The valuer will give their opinion of three main figures:

• The current value of the site
• The build cost
• The value once developed (GDV)

It is important to have fully researched these figures, a difference of opinion at this stage can change the risk profile of the case. Some lenders will change their quoted interest rates if the valuer’s opinion differs significantly from your own.

Key Ratios

There are a few key ratios which are used to assess the case and give a general indication of risk profile.

• Loan to Cost – this is the loan amount divided by the total cost of the site (purchase, build, fees).
• Loan to GDV – the loan amount divided by the Gross Development Value

Jargon

The language used in this area of finance is different to other areas of finance. There are a few terms to get used to:

• Gross Development Value (GDV) – this is the value of the development once it is built. In other words, what you think it will be worth.
• Total Cost – the total amount of money spent on the site including purchase price, build costs, finance fees, legal/professional fees, surveys and so on.
• Quantity Surveyor – a specialist surveyor who assesses the financial feasibility of a site before the build, they would then monitor the project through its duration checking funds have been spent on a site correctly. The QS gives their sign off to the Lender to release each stage of funds.
• Monitoring Surveyor – a monitoring surveyor or project monitoring surveyor (PMS) reviews how funds are spent on a site and gives the Lender the go-ahead to release the next stage of funds. They are similar to a Quantity Surveyor though have less duties and generally a little cheaper.
• Uplift – in Economics, an ‘Uplift’ refers to an increase in value. For example, when you get planning permission on a site you benefit from ‘Planning Uplift’, the site may now be worth more with those permissions.

Development Finance vs Self-Build

You may have heard of Self-Build Mortgages. Self-builds are for people building their homes, whereas Development Finance is designed for business projects motivated by profit. Self Build mortgages are regulated, whereas development finance is unregulated and generally more flexible. Here is a summary of the differences:

Planning & communication

Developments are some of the most complex property transactions you can be involved in. Planning your build, allowing for contingencies and clear communication are all very important. Seemingly small details can have an impact; you can never overprepare or over-communicate.

Every development is different; if you would like to understand your options, the best thing would be to give us a call.

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