Development Finance

Funding to assist with the purchase and building costs of a residential or commercial build project.

Funding to assist with the purchase and building costs of a residential or commercial build project.

When completing any type of development project, you will need funds to

a) Purchase the land/property

b) Complete the build/refurbishment

The finance pyramid

The 3 parts of funding for development projects

Senior debt / development finance

Senior debt can be used to finance all the build costs and part of the purchase costs. The lender will take a first legal charge against the land / building title(s).

Senior debt is usually capped at 65% LTGDV, 80% LTC and 70% LTV (The maximum loan is calculated using these three metrics as an assessment). There are some lenders whose metrics are a little higher.

There are several factors that are taken into consideration when a lender assesses your loan. The main factors are outlined below:

  • Loan to value (LTV)

  • Loan to cost (LTC)

  • Loan to gross development value (LTGDV)

  • Developers experience

  • Build cost viability

  • Asset and liability of key principles

  • Credit scoring

  • Location of development

  • Construction method

Junior debt / mezzanine finance

Mezzanine finance is accessed if there is a shortfall in Senior Debt loan funds. The lender will take a second legal charge against the land / building. This is more expensive to obtain (typically 15%-25%). The funds are used towards the purchase costs first, so you are being charged on the interest as soon as you are provided with the loan funds.

Equity finance / developers deposit

The developers deposit can come from a range of sources:

  • Cash held in savings

  • Sale proceeds from an existing development

  • A finish and exit product for the previous development

  • Equity release from other properties owned (mortgage/bridging finance) – this can include overseas assets

  • Forward selling the completed development (usually a 10% deposit in paid by the purchaser)

  • Business loan from another business owned

  • Borrowed funds from friends / family

If the developer cannot put down a deposit, there are equity providers that will give developers funds to cover the deposit. Typically, this is completed as a joint venture (JV). Different equity providers structure the JVs in different ways. Some charge interest / coupon on the amount they provide AND take a profit share of the completed development.

Make sure you read the fine print in any JV agreement!

Additional security

The lenders may ask for additional security:

  • Debenture against the company

  • Collateral Warranties – A contractor, sub-contractor of professional consultant provides a contract assuring a third party (such as a lender) that they have complied with its building contract or sub-contract. This falls under their professional indemnity insurance and they can be sued if the contracts are not met.

  • Second charges

  • Personal guarantee from Directors and Beneficial owners (Majority shareholders). Personal guarantees can be capped at a percentage of the loan amount.

  • Cost overrun guarantee – these can be capped at a percentage of the build costs

Repayment of loans

Once the development is complete, you will need to repay this finance. Please note that in most cases you cannot choose who you pay first. It usually is repaid in this order:

  • 1. Senior Debt provider (as they hold a first legal charge)

  • 3. Equity finance provider

  • 2. Mezzanine finance provider (as they hold a second legal charge)

  • 4. Developers profit

In most cases the developer gets paid last although this can be negotiated with the equity provider as part of the JV agreement.