There are many obstacles in the way of a first-time developer, primarily due to the difficulty in assuring lenders that you are a trustworthy developer, despite your lack of required experience.
The problem is, you can’t always get the necessary experience, especially if the lenders do not give you the finance needed for the experience.
Finance Facilities for Developments
Mezzanine Development Finance Features:
Although mezzanine development finance is a more expensive option, it allows the developer to put less of a cash investment into the project, it has a tax-deductible interest and comes with the possibility of a more desirable loan-to-value (LTV) ratio.
However, it may come at a cost in other ways, and your lender may receive more control over the project.
Development Finance Features:
Development finance is typically used for financing build costs/development, and to cover the cost of land. For it to work to your advantage, you should restrict development finance facilities to 60% of the land cost and 100% of the build cost.
It is majorly regarded as a loan for highly experienced developers; this is because lenders invest in what they trust. Especially when it comes to high-risk developments, they weed out people with little experience by looking at your history in property development.
If you don’t have any experience as a developer, then it is unlikely that you will get the loan. However, it is not impossible.
Lenders often seek for developers to have experience when giving out development finance because:
- They can see their track record.
- Experienced developers have likely already made their mistakes and learned from them.
- Experienced developers are less of a financial risk than non-experienced developers.
Due to this bias, it can make receiving development finance difficult for those who are first-time developers with no experience in being a developer.
This doesn’t mean that you have no relevant experience; it just means that you do not have experience of working at the level required by the lender.
Here are some tips that can help you to impress these lenders and acquiring the funding that you need for your first development.
Importance of Experience:
Not all first-time developers are grouped into the category of being inexperienced in lenders standards. Some first-time developers have experience in commercial or residential property and know their way around loans and lenders.
This experience can also work in their favour when it comes to lenders giving out development finance.
Seek for the Correct Lenders:
Sometimes the types of places you are trying to buy will affect whether lenders are willing to invest in your project. Most lenders will avoid properties that:
• Are derelict
• Have structural issues
• Are without a functioning bathroom
For projects with the above issues, you will need to contact a specialist lender that deals with this form of finance such as a bridging loan.
Learn more about bridging loans and how they can help with development finance.
Typically, high-street lenders are stricter about who they will offer their finances to.
Specialist lenders, on the other hand, are more willing to lend finances to developers with not as much experience, including for first-time developments as long as they have a sufficient plan that matches their standards.
You should always make sure that you know about the different types of lenders and do not let lenders meddle too much in your plan.
High-street lenders are known to try and change what you have planned by doing things their way. You need to stand your ground and keep control of the project.
Development finance lenders will only release funds in stages and often partake in some site inspections before providing any finance. However, they can also sometimes hold off on giving you the money until you complete a required piece of work.
Try to find a lender who works flexibly and trusts that you know what you are doing without trying to meddle.
Importance of a Plan:
Be knowledgeable and prepared. Often developers with little experience do not accurately predict costs for things such as:
• Legal and administrative help
• Planning application
• Forget to take into account the possibility of delays and other unforeseen events such as illnesses, weather delays, and material delivery delays etc.
• Project management
• Marketing and selling transactions
It is always a good idea to contact lenders once you have a structured plan with a builder and architect on board.
This will help to gain the lender’s trust and demonstrates that you are investable by providing a carefully planned structure of the project to invest in and letting the lender know that you know what you are doing and have taken all the necessary precautions into your plan for you development to go ahead smoothly.
To create a carefully constructed plan, you can get your application ‘packaged’ by an experienced broker.
Your plan must also portray that you clearly understand the costs involved in your development idea, and that you understand cost control and how to manage your finances effectively.
A ‘Packaged’ Application:
An experienced broker can ‘package’ your application in order to ensure that you know what you are doing and that the development is planned to a professional and detailed standard to which the lender will expect.
A ‘packaged’ application is primarily a business plan diary, that will detail the steps of your development in extensive detail. It will contain information such as:
- the purchase of the land or building
- Detail the build costs
- Detail the costs to finance, insurance, marketing, architects, and professional fees
- It will also detail any potential legal issues that may arise and the plan to avoid or solve them
- It will take into account possible barriers and problems that may present themselves within the project such as illnesses or late deliveries of materials and how this may affect funding costs
- A detailed exit plan
A ‘packaged’ application shows to the lender that you have planned efficiently and entirely for any barrier that may stand in your way. It presents your project as being well thought out investable if you provide as much information and possibilities that may arise as you can.
Lenders do not appreciate over-confidence; it is wise, to be honest about any problems that your development may run into and provide options for solving that problem or avoiding it.
Experienced brokers will be able to help you along the way and provide all of the help that you may need in creating a business plan that is fit for a lender and transform your investability.
Property Finance Partners has vast experience in development finance with many structured finance facilities for developers. Contact us today on 020 3393 9277. Or click the button below and complete the form.
Have a Joint Venture Partner (JV):
Pairing with a joint venture partner involves two or more developers bringing their resources together.
In order to fund development, you can pair with a partner who can provide experience as well as knowledge. This then puts you in a much stronger position in attracting finance.
This is a good way for less experienced developers to gain experience with development and to learn from people in the business. A perfect solution for first-time developers.
For this to work, you need to contribute to the development with more than just an idea, or a plan. It would be required if you contributed in ways such as;
• Paying the deposit
• Providing the land for the development
If you want to learn more on 100% development finance. This section outlines the required.
Lenders may also provide development finance to you if you are working with an experienced developer, as they will know that your joint venture partner knows what they are doing and therefore automatically makes you more investable.
Keep in mind that most joint venture partners will want a share of the profit on the development. An advantage of having an experienced developer on board is that you will have access to many lenders and will give you the experience to go solo on future projects.
Seeking a joint venture partner for your first development project is an excellent way to increase your investability to lenders, and also a superb way to gain experience.