Development Exit Finance: A Complete Guide

Development exit finance is a great tool for property developers that works much in the same way as a bridging loan.

Used for various purposes in property development, it is essential to learn about all of its applications, common issues and the best ways to find the most competitive rates.

What is development exit finance?

Development exit finance is a type of short-term funding used by property developers to repay an existing development finance loan.

This financial solution is typically sought when a development project is nearing completion or has recently been completed but has not yet been sold or fully tenanted.

It allows developers to release equity from the project, reduce borrowing costs, and provide additional time to market and sell the property at optimal prices, making it a critical property finance tool.

When is it typically used?

Developer exit finance is typically used in the following scenarios:

• When a development project is close to completion but the developer needs additional time to sell the units or secure tenants.
  
  
• To repay an existing development loan that is due for repayment, thus avoiding penalties or higher interest rates.
  
  
• To release capital from the completed project, which can be used for other investment opportunities or to improve cash flow.
  
  
• When the developer wants to reduce the overall cost of borrowing by switching from the higher development finance interest rates, to the lower interest rates on exit finance. 
  
  

How does it benefit investors?

Development exit finance offers several benefits to investors:

• Cost Savings: By refinancing a high-interest development loan with a lower-interest exit finance loan, investors can significantly reduce their borrowing costs.
  
  
• Increased Flexibility: It provides developers with additional time to market and sell the property, potentially achieving higher sale prices.
  
  
• Improved Cash Flow: Releasing equity from the completed project can improve cash flow, allowing investors to reinvest in new projects or cover other expenses.
  
  
• Risk Mitigation: It helps avoid the risk of defaulting on an existing development loan, which can have severe financial and reputational consequences.
  
  

Should all projects use it?

Not all projects may benefit from development exit finance, since it's most suitable for projects that are near completion or have recently been completed, but have not yet achieved full sales or tenancy.

Developers should consider the following factors before opting for exit finance:

• The current market conditions and the likelihood of selling or leasing the property within the extended timeframe.
  
  
• The cost of exit finance compared to the existing development loan.
  
  
• The potential benefits of releasing equity versus the costs involved.
  
  
• The overall financial health of the project and the developer's ability to meet the new loan's terms and conditions.
  
  

What are the exit strategies for development?

Exit strategies for development projects typically include:

• Sale of Units: Selling individual units or the entire development to end-users or investors.
  
  
• Refinancing: Refinancing the development loan with a long-term mortgage or another financial product.
  
  
• Leasing: Securing tenants for the property to generate rental income, which can then be used to service the loan.
  
  
• Joint Ventures: Partnering with other investors or developers to share the financial burden and profits of the project.
  
  

What are the costs involved with development exit finance?

Development exit finance, while beneficial, comes with various costs that developers should consider. Thankfully these tend to be lower compared to the costs of development finance.

Understanding these costs can help in making a more informed decision.

Interest Rates

Interest rates for development exit finance are typically lower than those for development loans but can still vary significantly depending on the lender and the risk profile of the project. Rates are usually charged on a monthly basis, reflecting the short-term nature of the loan.

Arrangement Fees

Most lenders charge an arrangement fee for setting up the loan. This fee is usually a percentage of the loan amount and can range from 1% to 2%. It covers the administrative costs incurred by the lender in processing the loan application.

Valuation Fees

A professional valuation of the property is often required to determine its current market value. This valuation is crucial for the lender to assess the loan-to-value ratio and the risk involved. The cost of the valuation is typically borne by the borrower.

Legal Fees

Legal fees are incurred for the preparation and review of loan documentation. Both the lender and the borrower may have their own legal representatives, and the borrower is usually responsible for covering these costs. Legal fees can vary depending on the complexity of the loan agreement.

Exit Fees

Some lenders charge an exit fee when the loan is repaid. This fee is also a percentage of the loan amount and is intended to compensate the lender for the early repayment of the loan. Exit fees can range from 1% to 2%.

Broker Fees

Brokers typically charge a fee for their services, which can be a fixed amount or a percentage of the loan amount. However, the benefits of using a broker, more often than not, far outweigh the costs due to their ability to secure better loan terms.

Additional Costs

Other potential costs may include:

• Monitoring Fees: Some lenders require regular monitoring of the project, especially if it is not fully completed. The cost of these inspections is usually passed on to the borrower.
• Insurance: Adequate insurance coverage for the property is often a requirement, and the cost of premiums must be factored in.
• Early Repayment Fees on Development Finance Loan: If you repay your development finance loan early by switching to exit finance, you might incur early repayment penalties.

In summary, while development exit finance can provide significant benefits, it is essential to consider all associated costs. Unfortunately, in many cases, developers won't have a choice but to go down the route of developer exit finance.

By establishing a strong relationship with a broker for all of your development financing needs, you can nearly guarantee to find the best rates and fees, whilst removing some of the lengthy processes.

Who provides exit finance?

Exit finance is provided by various financial institutions, including:

• Specialist Loan Brokers: Businesses that specialise in finding customers the best possible finance deal.
  
  
• Banks: Some banks offer exit finance as part of their commercial lending services.
  
  
• Private Investors: High-net-worth individuals or private investment firms may offer exit finance, often with more flexible terms.
  
  
• Bridging Finance Companies: These companies specialise in short-term loans and can provide exit finance to bridge the gap between the completion of a project and its sale or refinancing.
  
  

Should I use a finance broker?

Definitely! Using a finance broker can be highly beneficial.

Here are some reasons why you might want to use a finance broker:

Expertise and Knowledge

Finance brokers have extensive knowledge of the lending market and can provide expert advice tailored to your specific needs.

They understand the intricacies of various financial products and can help you navigate the complexities involved.

Access to a Wide Range of Lenders

Brokers have access to a broad network of lenders, including those not typically available to the general public.

This means they can find competitive rates and terms that you might not be able to secure on your own.

Time-Saving

Searching for the right lender and comparing different loan options can be time-consuming. A broker can do this legwork for you, saving you valuable time and effort.

Negotiation Power

Brokers often have established relationships with lenders and can negotiate better terms and rates on your behalf.

This can result in more favourable loan conditions and potentially lower costs.

Tailored Solutions

A finance broker can assess your unique financial situation and recommend the most suitable financing options.

They can tailor their advice to ensure the loan meets your specific requirements and exit strategy.

Simplified Process

The application process for a loan can be complex, involving various documentation and legal requirements.

A broker can guide you through each step, ensuring all paperwork is correctly completed and submitted.

Cost-Effective

While brokers charge a fee for their services, the savings they can secure through better loan terms and rates often outweigh the cost.

Additionally, they can help you avoid potential pitfalls that could result in costly mistakes.

Ongoing Support

A good broker will provide ongoing support throughout the loan term, assisting with any issues that arise and helping you manage your repayments effectively.

In summary, using a finance broker can provide you with expert guidance, access to a wider range of lenders, and potentially better loan terms, making the process of securing finance smoother and more efficient.

Finance Nation

If you want to dive straight into exploring finance options, you're already in the right place.

Our experienced team understands the challenges faced by property developers looking for the most time and cost-effective solutions, and we're here to help.

With our cutting-edge Fintech platform, we ensure seamless access to tailored finance solutions that suit your needs.

With access to lending products you won't find elsewhere, we'll identify the best deal for you and keep things moving until the funds are where they need to be.

Contact us now and we will arrange a call to discuss your financial needs along with your next best step forward.

Development Exit Finance | FAQ

What are the potential drawbacks or risks associated with using development exit finance?

The potential drawbacks or risks of using development exit finance include the possibility of higher costs compared to long-term financing options, as there may be arrangement fees and legal costs associated with securing the loan.

Although the interest rates may be lower than those of high-interest development loans, they can still be significant.

Additionally, the short-term nature of development exit finance means that if the property is not sold or tenanted within the loan term, the developer may face the need to refinance again, which could incur further costs.

There is also the inherent market risk; if market conditions deteriorate, it might be challenging to sell or lease the property, leading to financial strain on the developer.

Moreover, not all projects qualify for development exit finance, particularly if there are issues with the property's marketability or if the developer has a poor credit history.

How does the application process for development exit finance differ from other types of property finance?

The application process for development exit finance differs from other types of property finance in several ways. It is typically faster, as it is designed to provide quick access to funds, which is crucial for developers nearing the completion of a project.

Developers need to provide detailed information about the project, including its completion status, sales and tenancy plans, and details of existing loans.

Lenders may also require appraisals or valuations to assess the property's current value. Unlike traditional loans that focus heavily on the developer’s credit history, development exit finance places significant emphasis on the project’s current status and market potential.

Lenders will closely scrutinize the developer's exit strategy to ensure that the loan can be repaid within the specified term, often requiring proof of sales contracts or tenancy agreements.

What are the typical interest rates and fees associated with development exit finance compared to traditional development loans?

Development exit finance generally offers lower interest rates compared to traditional high-interest development loans, although these rates are typically higher than those for long-term mortgages.

The exact rates can vary widely depending on the lender, the specific risks associated with the project, and current market conditions.

In addition to interest rates, developers can expect to encounter various fees, including arrangement fees that are usually around 1-2% of the loan amount, legal fees, valuation fees, and occasionally early repayment charges.

It's important for developers to weigh these fees against the potential savings from reduced interest rates when considering development exit finance.

How long is the typical term for a development exit finance loan, and what happens if the property is not sold or tenanted within that term?

The typical term for a development exit finance loan ranges from 6 to 24 months, although the exact duration can vary depending on the lender and the specifics of the project.

If the property is not sold or tenanted within this term, the developer may need to seek refinancing options.

This could involve securing another development exit finance loan, converting to a long-term mortgage, or potentially selling the property at a lower price to expedite the process.

Failure to refinance or sell the property within the loan term could result in default, leading to severe financial consequences, including the possibility of foreclosure.

Are there any specific qualifications or criteria that developers need to meet to be eligible for development exit finance?

To be eligible for development exit finance, developers need to meet certain criteria.

The project should be near or at completion, with all major construction work finished, to demonstrate that it is ready for market. The property must be marketable, which generally means it is in a good location, constructed to high standards, and there is demand in the market.

The developer should have an existing development loan that is approaching maturity or is due for repayment.

Additionally, lenders will consider the developer’s experience and track record in successfully completing similar projects, as well as their overall financial stability and ability to meet the loan terms, including repayment from the expected sales or rental income.