Development Finance: Your Complete Guide

What is development finance?

Development finance serves as a short-term funding solution, aimed at supporting residential or commercial development endeavours. This specialised financing addresses the purchase costs and construction expenses associated with projects, ranging from a ground-up new build to property conversions or refurbishments.

What are the types of development finance?

Development finance is a specialised form of funding tailored to support various types of development projects, offering flexibility and versatility to developers. Here's a breakdown of the key types of development finance:

Purpose of Use: These loans serve multiple purposes, including financing a new build, commercial or semi-commercial property development, renovations, conversions and refurbishments. They can accommodate single-unit developments as well as large multi-unit schemes.

Regulated Development Finance: In cases where more than 40% of the development will be used as a residential dwelling by the borrower, the development finance becomes regulated. These loans offer consumer protections governed by the Financial Conduct Authority (FCA).

Mezzanine Development Finance: Mezzanine development finance serves as a secondary line of borrowing for the same development. It is often used to reduce the need for a large cash deposit and may be referred to as a 'junior loan' or a 'junior mortgage'.

Understanding the process of development finance

The journey from initial inquiry to project completion typically involves several key stages:

Stage 1: Initial Inquiry and Consultation

Prospective borrowers initiate the process by seeking advice and guidance regarding their development plans. This often includes contacting lenders or brokers to discuss the feasibility of their projects.

Stage 2: Indicative Terms and Agreement in Principle

Following the initial consultation, borrowers receive indicative terms from lenders, outlining the preliminary terms and conditions of the finance offer. This allows borrowers to assess the suitability of the financing option and proceed with a formal application if they are satisfied.

Stage 3: Due Diligence and Site Visit

Lenders conduct due diligence on the proposed development project, which may involve site visits, evaluations, and assessments of project feasibility. This step is crucial for evaluating the risks and potential returns associated with the project.

Stage 4: Formal Loan Offer

Upon successful due diligence, lenders extend a formal loan offer to the borrower. This offer outlines the final terms and conditions of the financing arrangement, the amount being loaned, interest rates, and repayment terms.

Stage 5: Legal Documentation and Completion

Once the loan offer is accepted, legal documentation is prepared and executed by all parties involved. This documentation formalises the terms of the loan and facilitates the transfer of funds to the borrower. Completion marks the first drawdown of funds, enabling the borrower to proceed with purchasing land or commencing construction.

Stage 6: Project Commencement

With funds disbursed, developers can commence their projects according to the agreed-upon plans and timelines. This stage marks the beginning of construction or development activities, with careful monitoring and management of project progress.

Stage 7: Repayment

Repayment of the loan typically occurs upon the sale or refinancing of the completed development project. Developers must adhere to the agreed-upon repayment schedule, ensuring that the loan is repaid in full, along with any accrued interest and fees.

In summary, the process of obtaining development finance involves a series of well-defined stages, from initial inquiry to project completion, each essential for ensuring the successful funding and execution of development projects.

What is the typical term for development finance?

The typical term for development finance is entirely dependent on the nature of the project. Some lending periods for smaller renovation projects may be just 6 months, but bigger multi-unit ground-up builds can take up to 24 months.

What are the rates involved?

Typically rates range anywhere from 7% to 15%. Whilst this is an important figure, other fees and costs must be considered equally.

Common fees in development financing

Lender arrangement Fee: Charged by the lender for providing the finance.

Broker arrangement fee: Fee paid to the broker who facilitates the deal between borrower and lender, along with any additional professionals involved.

Monitoring surveyor fees: Costs incurred for professional oversight to ensure compliance with regulations and deal terms throughout the loan term.

Exit fees: Applied when the loan is repaid, typically calculated as a percentage of the loan amount.

Legal fees: Expenses associated with legal services throughout the financing process.

Non-utilization fees: Charged by lenders for funds made available but not utilised by the borrower.

Management/admin fees: Costs related to loan management and administration.

By comprehensively understanding and factoring in these costs and fees, developers can effectively plan and manage their finances throughout the development project. It's advisable to consult with professionals and utilise resources like Finance Nation to navigate the intricacies of development finance efficiently.

How much can I borrow?

Development loans start from just £X. Different lenders will have different upper limits but through our service, we can provide up to £X.

Can I get 100% development finance?

To access 100% property development finance, you will need to meet difficult requirements set out by your lender. This can vary from lender to lender but generally, you will need experience, a strong proposal, a comprehensive exit strategy, a minimum loan amount, a profitable scheme and more.

Developer Experience: UK lenders are more likely to provide 100% development finance to experienced developers as this reduces the risks associated with repayments.

Strong Exit Strategy: Having a clear exit strategy that demonstrates a repayment structure is key for gaining lender confidence.

Minimum Loan Amount: Some lenders will require a minimum loan amount of around £1 million. It is worth checking this before submitting your application.

Good Proposal: A well-structured proposal that outlines your development plan, permissions, requirements, and strategies is another important criteria for showing the lender that you will use the loan wisely.

Collateral: While 100% development finance eliminates the need for a deposit, lenders may require additional collateral such as the property being developed or another asset to mitigate risks.

Essential tips to consider before applying for property development finance

Before diving into the world of development finance, it's crucial to consider several key factors to ensure a successful project. Property developers at any level of experience can face challenges, so thorough preparation is essential, especially for first-time or minimally experienced developers. Here are some essential tips to keep in mind before applying for funding:

Evaluate the development:

Assess the property's history and any reasons for its prolonged presence on the market.
Determine your budget for purchasing the property or land and factor in potential building costs.

Plan for contingencies:

Build a contingency fund to address emergencies or unexpected cost overruns during the project.
Evaluate the projected value of the finished project compared to similar developments in the area.

Assess market demand:

Determine the demand for your development and identify your target buyer demographic.
Analyse local competition to understand market saturation and potential challenges.

Project profitability:

Calculate your projected profit and establish a timeline for project completion.
Consider factors such as financing costs, taxes, and other expenses that may affect profitability.

Before approaching lenders for funding, it's essential to address the following:

Review your credit:

Check your credit score and report to ensure its accuracy.
Correct any errors with credit reporting agencies to strengthen your credit profile.

Prepare necessary documents:

Ensure all required paperwork is complete and accurate to avoid delays in funding approval.
Organise financial statements, project plans, and any other relevant documents for easy access.

By thoroughly considering these essential tips, you can position yourself for success when applying for development finance and embark on your project with confidence.

What is development exit finance?

Development exit finance, a form of bridging finance, is extended to developers upon project completion, yet before property sale or long-term mortgage refinancing. While developers are typically required to settle development loans upon project completion, the process of selling the property or securing a mortgage can entail a delay.

To bridge this gap, lenders offer development exit finance, which repays the higher-interest development loan and remains in place until proceeds from unit sales or long-term mortgage funds become available to repay the exit loan.

Exit loans often feature lower interest rates compared to development finance, making immediate refinancing upon completion a financially prudent move.

Can I get funding as a first-time developer?

Securing funding as a first-time developer is possible, although it may be challenging. Typically, lenders evaluate various factors when considering applications from newcomers to the development scene. While a lack of prior developer experience could make it more difficult to obtain the necessary funds independently, there are avenues for financing available.

One option is seeking support from niche funders specialising in backing projects initiated by first-time developers. Alternatively, mainstream lenders may be willing to extend financing if the first-timer collaborates with an experienced developer to co-manage the project. This arrangement not only provides access to crucial expertise but also reassures lenders about the project's management and execution.

Additionally, lenders assess the feasibility of the development project, the financial status of the developer, and their credit history. While a solid credit history can enhance the chances of securing finance, it's not necessarily a deal-breaker for those with less-than-perfect credit scores. Some lenders are open to providing construction loans to first-time developers with such credit backgrounds.
It's important to note that in many cases, lenders may require a personal guarantee as part of the loan agreement. This commitment entails agreeing to personally repay the loan if the development project fails to generate sufficient revenue to cover the repayments. Such provisions are standard in developer finance, irrespective of the developer's experience level.

Therefore, while challenges may exist, with thorough planning, collaboration, and a clear project vision, first-time developers can indeed secure the funding needed to bring their projects to fruition.

What is joint venture development finance?

Joint venture (JV) property development finance involves a partnership between a developer and a financier, where the financier funds up to 100% of the project in exchange for a share of profits upon sale, plus interest. The financing is facilitated through a special purpose vehicle (SPV), acting as a temporary holding company. Borrowed funds are repaid upon property sale, with profits split, typically 60% to the developer and 40% to the financier. This type of structure enables ambitious projects without significant upfront investment plus offers attractive returns for both parties involved.

Understanding infrastructure development finance

Infrastructure development finance refers to securing the funds needed to plan, construct, and maintain vital physical structures and facilities, including new build projects, that underpin society and the economy. This encompasses a broad spectrum of projects, mainly roads, bridges, airports, energy facilities, water supply systems, telecommunication networks, and other essential infrastructure.

Ensuring infrastructure development is critical for economic growth, advancing social development, and enhancing citizens' quality of life. However, these projects often demand substantial financial resources that may not be readily accessible to governments and private sector entities.

How will the loan be repaid?

Repaying a development loan offers various avenues tailored to the borrower's preferences and project circumstances. Here are the standard options:

Sale proceeds: Upon completion of the development project, borrowers can use the sale proceeds from the finished property to repay the loan in full. This straightforward approach allows borrowers to settle their debt and instantly realise profits from the project.

Long-Term refinancing: Borrowers may choose to refinance the development loan with a new, long-term loan if they intend to retain ownership of the completed development or rent out the property. This option provides flexibility for borrowers to continue benefiting from their investment over the long term.

Development exit bridging loan: Another option is to refinance the loan using a development exit bridging loan, which typically offers a lower interest rate. This strategy enables borrowers to take out profits quickly and potentially fund future projects without waiting for the sale of the current project. By leveraging this tactic, borrowers can efficiently manage their finances and optimise their investment portfolio.

Each repayment option offers distinct advantages, allowing borrowers to tailor their approach based on their financial goals and project objectives. Whether aiming to maximise profits, retain ownership, or pursue new opportunities, borrowers can select the repayment strategy that best aligns with their needs.

Should I use a development finance broker?

When navigating the complexities of development finance, enlisting the help of a knowledgeable broker can be invaluable. Here are several reasons why selecting a development finance broker is a wise choice:

Specialised expertise:

Development finance brokers possess specialised knowledge and experience in the intricacies of property development financing. They can offer valuable insights and guidance tailored to your specific project requirements.

Access to lenders:

Brokers have established relationships with various lenders in the industry, including traditional banks, private lenders, and alternative financing sources. This network allows them to connect you with the most suitable lenders for your project, increasing your chances of securing favourable terms.

Customised solutions:

A development finance broker can assess your project's unique needs and tailor financing solutions accordingly. Whether you require short-term financing for a fix-and-flip project or long-term funding for a large-scale development, a broker can help you find the right financing package.

Efficiency and convenience:

Brokers streamline the financing process by handling paperwork, negotiations, and communication with lenders on your behalf. This saves you time and effort, allowing you to focus on other aspects of your development project.

Choosing a development finance broker can significantly enhance your chances of securing the right financing for your project while minimising risks and maximising returns.

Why choose Finance Nation?

At Finance Nation, we're your trusted broker, committed to finding the perfect asset finance lender for you. With our cutting-edge Fintech platform, we ensure seamless access to tailored finance solutions that suit your needs.

Our experienced team understands the challenges faced by property developers, and we're here to help. 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.

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