Development finance is a kind of credit intended to assist property developers in financing projects such as new construction, renovations, and conversions. These loans may enable developers borrow enough money to pay up to 70% of the land and construction expenses.
Development finance could look something like this:
The developer has chosen to buy a piece of land on which to construct three semi-detached houses. The site is for sale for £250,000, with a construction cost of approximately £400,000. The bank has agreed to pay 70% of the land acquisition price as well as all construction expenses.
- – £250,000 is the cost of purchasing the land.
- – The estimated cost of construction is £400,000.
- – £175,000 in development finance and £400,000 in construction funding
- – £575,000 is the total loan amount.
In this case, the developer will just need to put £75,000 of their own money into the project.
The financing will allow the developer to complete the project or begin new ones.
These loans are only available from specialised lenders. Because of the present housing scarcity, getting your project financed is very simple at the time.
However, knowing what lenders look for when determining whether or not to fund a project is important if you are considering obtaining development finance. Every application is still thoroughly examined.
Amount of the loan
The loan amount is entirely up to the borrower’s choice, since development finance lenders may be willing to give anything from £1000,000 to £1 billion. Nonetheless, the entire loan amount is usually computed using the gross development value (GDV).
This number represents the estimated value of a property development after it is completed as a percentage. Lenders will compare how much you want to borrow to this amount. The bulk of lenders will only pay out up to 70% of the loan amount.
Term of the Loan
Depending on the size of the project, various lenders will provide varying timelines. Development finance, on the other hand, has periods ranging from a year to 36 months with no early repayment penalties.
Development finance lenders will look at your past property development expertise when processing your application. They’ll want to see proof of prior initiatives and, more crucially, know whether or not they were successful.
Lenders, understandably, do not want to take chances when dealing with big amounts of money. They want proof that you can effectively develop property, create profit, and, most crucially, earn enough money to repay the loan they provide you on time.
The Location of the Development
The lender will be interested in learning more about the location since, in real estate, location is everything, and the area in which the property is located will have a significant impact on the development’s worth once finished.
Furthermore, lenders are hesitant to finance several projects in the same region.
Requirements for Planning Permission
Lenders will want to know whether you have the required planning approval before they give you any money.
Plan of Exit
Lenders of development finance will want to know how you plan to repay the loan. It’s critical to plan ahead of time for how you’ll pay back the loan.
You may accomplish this in a number of ways:
- – Individual houses or the whole complex may be sold.
- – Rent out the finished home and choose a long-term financing package.
Project Feasibility Analysis
The lender will assess your project’s feasibility and inquire about any issues raised by the borrower. This is why it is critical that the property developer submits a thorough and well-thought-out application. You should be ready to answer any tough inquiries and provide answers to their problems.
Information and documentation required
Detailed information about the project site, including its location, value, and purchase price.
Evaluation of the Development
This is an assessment of the development’s financial risk.
A qualified valuer will evaluate how effectively your planned development project’s expenses will be fulfilled. In addition, these papers will detail how the proposed project would affect the surrounding environment and community.
Councils will also use the assessment to assess the property development’s economic feasibility.
Costs of Development are broken out in detail.
The significance of providing a comprehensive cost overview cannot be overstated. The lender may accept the number at first sight, but if they dig further, it’s critical to give sufficient details.
Any predicted numbers are meaningless if they are based on incorrect data. Lenders will be unable to set up a drawdown plan for you without this information.
Planning Permission Specifications
Giving the lender information about any planning permit you have will help them comprehend the project completely.
What kind of structure has been authorised by the authorities, and what precisely do you want to construct?
It may be beneficial to go over planning papers as well as any drawings. This data will also aid them in determining if the projected costings are correct. Having all of the necessary planning permissions in place will significantly assist the application.
Any planning limitations, if any, as well as any community infrastructure contributions, should be included.
Information about the Applicant
Lenders will ask for specific information about your previous projects in order to verify your previous property development expertise.
This will most likely include a CV and a list of previous work. They should contain information regarding the project’s success. Is it true that they made a profit? The lender will also want to know about the development expenses and the price at which they were sold. The lender will gain trust in your capacity to manage your planned project if you provide this information right away.
If lenders are certain that the project is not a danger, they will keep expenses low. The lender will want to examine the project managers and primary contractor’s information if the borrower is just starting out as a property developer and doesn’t have any prior expertise.
Timeline for Development
To get a better understanding of the project, the lender will want to see a comprehensive schedule of the work that will take place throughout the course of the project.
They will be able to create a suitable payment plan by bringing all of this information together with costings.
The people you choose to work on your property development project will determine how eager a lender is to provide you a loan.
Lenders will avoid working with anybody who does not have a proven track record. They will also be hesitant to deal with someone who is inexperienced.
Lenders, on the other hand, will be eager to finance the project if you collaborate with renowned and experienced individuals.
Assets, Liabilities, Income, and Expenditure Summary
Lenders will examine at an asset, liabilities, income, and spending summary before accepting your application (ALIE). This document should be completed as soon as feasible.
The lender will want to see one to verify that if your income dropped or even ceased throughout the project, you would still be able to sustain yourself financially and cope with any delays or expenses that arose.
This will also help them assess your ability to back up a personal guarantee. Identification, proof of residency, and a refundable deposit are all required.
To show you are not involved in money laundering, you will need to confirm your identity, residency, and capacity to make a deposit. It is recommended that you provide this information right immediately.
Getting Approved For Development Financing
It’s critical to make sure your development financing application stands out and has a good chance of being approved. This may be accomplished in a variety of ways, including:
You should make sure that all of the information you include in the application is clear, accurate, and well-organized.
This will aid in the application’s appearance of professionalism and thoroughness.
Numbers should not be exaggerated
Inflating the projected value of a finished project is never a good idea.
Lenders aren’t dumb, and they’ll be able to detect if you’ve done anything like this. If they think anything is amiss, they are unlikely to trust the rest of your application and will most likely reject it.
Completely comprehend the numbers
It’s critical that you comprehend all of the figures in the paper, including the minor totals.
You’ll need to mention the phases of the project as well as when you’ll require the money. Lenders want to make sure you fully comprehend the project’s financial requirements.
Don’t exaggerate your experience.
Lenders will check into statements about previous property projects you’ve worked on; don’t fall into the trap of fabricating information to seem as if you have more expertise than you do. If you’re just getting started, explain that being honest is crucial.
F&M Finance have access to some of the best lenders across the United Kingdom. If you need funding for your next development project get in touch and see what we can do for you.