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Development Finance Rates

The Costs Of Development Finance
Development Plans And Rates

Property Development Finance is suitable for lots of different projects. The smallest loans generally begin at about £50,000 and have no largest amount.

The cost of developing property can involve hundreds of millions, and depending on the borrower’s strength lenders will gladly lend money in such quantitates.

These loans are designed for use in the short-term, and repayment is expected once the project is completed, from the funds raised through selling the property or refinancing.

The longest term for these loans is usually 48 months, and at standard lenders offer loans at a maximum of 18-24 months. Very few lenders will accept loans for a longer period.

Access Development Finance For Your Projects

How Your Loan Amount Is Calculated

Loan companies consider several factors to calculate what the maximum available loan is. Whilst traditional mortgages are based on loan to value, development finance is based also on alternative calculations.

  • Loan to Cost (LTC) – this is a unit employed to make comparisons between the total loan the lender is willing to pay as a percentage of the whole cost of completing the project.
    It is usually around 75%-85%. 80% is quite routine.
  • Day 1 Position – Lenders will spend time considering how much they are anticipated to offer to allow the project to begin and enable the borrower to buy the site.

    The highest accessible amount is typically around 60-70%. Although occasionally you can borrow more you have added certainty.
  • Loan to Gross Development Value (GDV): The loan to gross development value is the ratio amongst the highest amount the lender is willing to pay out based on the estimated cost of the build and the approximate value of the completed project on the open market.

    This ratio is available at 80% at its highest. The calculation is used to judge how secure a development loan is and whether or not it will generate profit when it is finished.

How Gross Development Value And Profits Are Calculated 

The Costs Of Development Finance
Property Development Finance Calculator

To take an example. The project involves 4 houses which each sell for £300,000. The overarching cost of the project including land and construction is £800,000. The Gross Development Value can be worked out as follows:

  • GDV: £1,200,000
  • Costs: £800,000
  • Profit: £400,000
  • Profit against GDV: 33.3%

Predicted GDV are best calculated in comparison to contemporary property sales in the same area.

Calculations can be made based on capital and rental value. Gross Development Value is the basis for any monetary support.

Increasing The Gross Property Development Value

1. Development Appraisals & Calculating A Budget

Development appraisals are a necessity and help make a decision towards whether or not a property development will be profitable or not. These types of assessments differ greatly but should involve calculating the GDV and budgets.

2. Land Acquisition 

How profitable a project is largely dependent on gaining the right land for development. Land acquisition is a sizeable proportion of the project’s final spend.

Within the UK, there are three kinds of land sites:

  • Brownfield: Plots that have been built on before that are unoccupied or require redevelopment
  • Greenfield: Sites without any previous development
  • Green Belt: This land is under strict protection, but is usually less expensive as a result of significant building restrictions.

Developers should note that planning authorities consider things like the community impact of the proposed build before making a decision. Strategic decisions can be made to gain approval.

For example:

  • Housing is more likely to be approved in areas where there is a housing shortage
  • Proposed projects close to transport are most likely to gain a big Gross Development Value, as these properties are most likely to turn a profit
  • Projects deemed good for the environment are likely to be approved, as the world becomes more environmentally aware

3. Funding 

Getting enough money to fund your project can be difficult. Securing the right loan is key.

Developers are advised to create three separate exit strategies; optimum, normal and ‘haircut’. Presenting a strong portfolio of previous work to lenders is the best way to get them to agree to fun your project.

4. Pre-Commencement Stage

Developers should consider who is likely to buy the property once they have finished development. This includes considering government schemes and the target market for particular property types.

Improving The Interest Rate on Your Property Development Loan

Development Finance Interest Rates can be as little as 4% per annum, which works out at about 0.34% per month.

The better the rate, the more difficult the deal is to get. To get the very best plan you will be required to fit particular criteria. You will need to:

  • Place a sizeable deposit
  • Possess an outstanding reputation developed over past comparable projects
  • Borrow a large amount of money which is surplus to £5 million
  • Be carrying out a project that when finished will be in significant demand
  • Be completing an innocuous project

For The Best Rates And GDV Loans Contact Property Finance Partners On 020 3393 9277

Development Finance Interest Rate Determiners 

Interest rates vary wildly between different lenders, however, there are additional factors which influence interest rates. Including:

  • The loan to value cost – The phrase is used to describe the correlation between the loan withdrawn and projected total cost.
  • The developer’s former experience Category of development – Commercial? Residential?
  • Location of the project – Lenders are far more likely to offer money for projects in London and Manchester than in Cornwall for example.

Understanding Development Finance Rates

Average plans begin at an interest rate of 4.5% and 5% per annum. On development finance, interest is requested as either a monthly or yearly rate.

To make sure you fully understand the rate, you should change the charges in a single rounded unit.

The easiest way to make this calculation is by dividing the yearly rate by 12 to establish the monthly rate or multiplying the monthly charge by 12.

1. Lender Arrangement Fees or Facility Fees

Lenders will incur a charge known as development finance arrangement fees for organising the loan and they are usually between 1% and 2% of the gross loan amount.

Generally, arrangement fees are attached to the loan facility, so borrowers can pay it when they repay the loan. Interest will also be imposed on this fee as it is part of the loan arrangement.

2. Exit Fees

An exit fee is a common component of development finance loan arrangements and will usually be around a 1% charge.

The fee is typically based on either the net loan amount or gross loan amount of the arrangement, or alternatively the project’s gross development value.

As well as establishing what the fees involve, it is pertinent to recognise how the fees are calculated.

The way the fee is calculated can alter the overall cost significantly.  

For example: If you the borrower, had an arrangement for £600,000 (net) that involved a 2% facility fee and 1% exit fee, across a couple of years, to finish a project with a GDV of £1 million, the exit fee will differ largely depending on what it is calculated against:

  • Net Loan – £6,000
  • Gross Loan – £7,000
  • Gross Development Value- £12,000

Exit fees are not taken until the arrangement has finished and the loan is redeemed and therefore do not involve interest charges.

3. Administration charges

Some lenders will expect you to pay administration fees, which can up to £1,000. These payments are taken after terms have been given and are accepted.

4. Broker Fees

Oftentimes, brokers will charge so-called brokers fees, as payment for finding a suitable lender. They come in two forms:

5. Upfront fees, alternatively called an engagement or commitment fee

Generally, these fees are not repayable and are used to secure interest in a broker’s resources.

6. Success Fee

This fee is expected when you receive an acceptable offer for a loan. In general, success fees are attached to the loan arrangement and taken off during drawdown. Brokers will delay until they receive this payment.

7. Valuation Fees

These fees can be particularly costly for developers. A surveyor will be instructed to make a valuation of the site for development in its current condition in great detail.

They will also be asked to make a judgement of how much it will cost to develop, the length of the build and probable cost of the completed project.

8. Solicitor Fees

Development lenders will expect you to pay both your own personal fees and any legal costs they encounter.

Legal fees can differ largely as do applications and the cost is dependent on factors such as the development’s location, the intricacies of the work involved and size of the site.

This is a type of professional fee, the loan cost may also include fees for architects and quantity surveyor.

9. Monitoring Fees

Lenders will often request surveyors to observe the progress of the project, throughout development, especially for large projects.

The surveyor must find the build satisfactory so that more money is awarded for the costs of the build.

Such visits are priced by the lender as monitoring fees and their cost will depend on both the lender and project.

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