If you are a property developer, it is essential to understand what development finance lenders look for when funding a project.
CONTENT
Introduction
Loan Amount
Loan Term
Experience
Development’s Location
Planning Permission Requirements
Exit Strategy
Project Feasibility
Necessary Information and Documentation
Appraisal for the Development
Detailed Breakdown of Development Costs
Details of Planning Permission
Information About The Applicant, or the Limited Company Directors
Development Schedule
Information About The Team
A Summary of Assets, Liability, Income and Expenditure
Proof of ID, Residence and Deposit
Making Sure Your Accepted For Development Finance
Introduction
Development finance is a loan specifically designed to help property developers fund projects, such as developments, renovations, and property conversions.
Such loans can help developers borrow enough to cover up to 70% of the land costs and the total build cost.
A development loan may look a bit like the following:
The developer has decided to purchase a plot of land to build three semi-detached homes.
The plot is available for £250,000, and the build cost will be around £400,000. The lender has agreed to cover 70% of the land purchase price and all of the building costs.
Land purchase price = £250,000
Projected Cost of The Build = £400,000
Development Finance = £175,000 and £400,000 for the build
Total Loan = £575,000
Based on this example, the developer will only need to use £75,000 of their own money.
The loan will enable the developer to continue with the project or start on others.
You can only get these loans from specialist lenders. As a result of the current housing shortage, it is relatively easy process to get your project funded at the moment.
Nevertheless, if you are thinking about getting development finance, it is useful to know what lenders look for when deciding whether or not to fund a project. Each application is still properly scrutinised.
Let this article be your guide.
Loan Amount
The size of the loan is really at the borrower’s discretion, as development finance lenders may be prepared to lend from as little as £1000,000 to as much as a £1 billion.
Nevertheless, the total figure of the loan is generally calculated based on the gross development value (GDV).
This figure is the projected value of a property development once it is finished expressed a percentage figure.
Lenders will consider how much you intend to borrow in comparison to this. The majority of lenders will pay out a maximum of 70% loan to value.
Loan Term
Different lenders will offer different timeframes based on the scale of the project. However, development finance terms are generally from a year to 36 months and do not incur early repayment charges.
Experience
Whilst processing your application, development finance lenders will look into your previous property development experience.
They will want to see evidence of previous projects and most importantly know if they were successful or not.
Naturally, when they are dealing with large sums of money, lenders do not want to gamble.
They want evidence that you can develop property successfully, generate profit and most importantly make enough money to pay back the loan they give you on time successfully.
Development’s Location
The lender will be keen to know information about the location, because in property location is paramount, and the area the property is in will have a great effect on the value of the development once completed.
Additionally, lenders are not too keen on funding multiple projects in the same area.
Planning Permission Requirements
Before offering any finance, lenders will want to determine whether or not you have obtained the necessary planning permission or not.
Exit Strategy
Development finance lenders will be keen to get an idea of how you intend to return the loan. It is essential to strategize how you are going to raise funds to repay the loan.
There are several ways you can do this:
- Sell the completed development as a whole or individual homes
- Rent out the completed property and opt for a financial product suitable for long term use
Project Feasibility
The lender will make a judgement of how feasible your project is and will ask the borrower about any concerns.
This is why it is so important that the property developer completes a detailed and considered application.
You should be prepared for any difficult questions with solutions to their issues.
Necessary Information and Documentation
Detailed information about the project site, including its location, value and how much it was bought for.
Appraisal for the Development
This is an evaluation of the development’s financial liability.
A skilled valuer will assess how well the costs of your proposed development project will be met.
These documents will also contain information on how the proposed project will impact the surrounding area and community.
Councils will utilise the appraisal to judge the economic viability of the property development also.
Detailed Breakdown of Development Costs
Providing a detailed summary of costs is of utmost importance.
The lender might accept the figure with just a glance, but it is important to provide enough information if they look into the nitty-gritty.
Any projected figures are not of value if they are calculated upon inaccurate figures.
Without this information, lenders will be unable to establish a drawdown schedule for you.
Details of Planning Permission
Giving the lender details of any planning permission you have will help them fully understand the project.
What building has been approved by the authorities and what exactly do you intend to build.
Looking through planning documents, as well as any sketches, can be helpful.
This information will also help them evaluate whether or not the proposed costings are accurate.
Having all the planning permission already will aid the application greatly.
You should include any planning restrictions if any, as well as any community infrastructure payments.
Information About The Applicant, or the Limited Company Directors
In order to prove your past property development experience, lenders will request certain details about your past projects.
This will probably involve a CV and a history of past projects. They should include details about how successful these projects were.
Did they make a profit? The lender will also want to know the development costs that were involved and their selling price.
By supplying this information straight away, the lender will be given confidence in your ability to navigate your proposed project.
Lenders will keep costs lower if they are comfortable that the project is not a risk.
If the borrower is starting out as a property developer and therefore does not have the experience, the lender will want to see the project managers and main contractor’s details.
Development Schedule
The lender will want to see a detailed schedule of the work that will take place throughout the duration of the project, to give them further clarity about the project.
Bringing all this information with costings will enable them to establish a proper payment schedule.
Information About The Team
The individuals you pick to work with you on the property development project will dictate how keen a lender is to approve a loan for you.
Lenders will not want to be involved with anyone that does not have a good track record.
They will also be less keen on working with anyone with a lack of experience.
On the other hand, lenders will be keen to fund the project if you are working with reputable and experienced people.
A Summary of Assets, Liability, Income and Expenditure
Before approving your application, lenders will stipulate that look at an asset, liability, income and expenditure summary (ALIE). You should produce this document as promptly as possible.
The lender will want to see one, to ensure that if your income lowered or even stopped at a point during the project, you would still be able to support yourself financially and deal with any unexpected delays or costs.
This will also help them gauge how well you could support a personal guarantee.
Proof of ID, Residence and Deposit
Confirming your identity, residency and ability to place a deposit will be necessary to prove you do not have any involvement in money laundering. It is advised to supply this information straight away.
Making Sure Your Accepted For Development Finance
It is important to make sure that your development finance application stands out and is likely to be accepted. Some ways to do this include:
Being Accurate is a Must
You should ensure that all the information you give in the application is comprehensible, accurate and laid out well.
This will help make the application look professional and thorough.
Do Not Exaggerate Any Numbers
It is never advisable to inflate the estimated value of the completed project.
Lenders are not stupid and will be able to tell when you have done this. If they suspect something is up, they are unlikely to trust the remainder of the application and will probably not accept your application.
Understand the Numbers Completely
It is vital that you understand all the numbers on the document properly, even the less significant totals.
You will need to include project stages and when you need the funds. Lenders want to ensure you completely understand the finances required for the project.
Do Not Overstate Your Experience
Lenders will investigate claims about former property developments you have been involved in, do not fall into the trap of making up anything to look as though you have more experience than you do. Being honest is paramount, if you are starting, say that.
