Development Finance | First Time Developers

Development Finance | First Time Developers
;- Up to 100% Loan to Gross Development Value (LTGDV)
- Up to 90% Loan to Cost (LTC)
- No experience required
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Development Finance | First Time Developers
Development Finance | First Time Developers
'; FREE QUOTECONTACT USUp to 75% Loan to Gross Development Value (LTGDV)
Private investors funding deposits
Rates from 0.44% per month
No experience required
Navigating the landscape of development finance, especially for first-time developers in the UK, can be a daunting task. Various channels offer development finance, including high-street banks, challenger banks, venture capitalists (often referred to as VCs), private equity firms, and joint venture lenders. Understanding the intricacies can be the key to securing the best deal for your project.
At Mortgage Lane we specialise in development finance for first time developers, partnering with the key lenders in the industry that do not require that level of experience for developing residential, or commercial property.
Below we will give you a tool kit including information and calculators to help understand development finance for first time developers.
Understanding the Basics of Development Finance
Development finance for first time developers primarily comes in two forms: equity and debt.
Equity Funding: This allows investors to secure a slice of the profit pie from the development project.
Debt Funding: Here, investors borrow the required funds, ensuring they retain the entirety of the profits upon project completion.
Lenders ensure their interests are protected by providing development finance on a secured basis, often taking a charge over the property or land.
For first-time developers to tap into development finance, presenting a comprehensive business plan that details the project, inclusive of financial projections and market research to evidence profitability, is crucial. The plan, coupled with a showcase of the developer’s experience, can significantly influence a lender’s decision. Some lenders might also ask for additional collateral, like personal guarantees or a legal charge on another property.
TRY OUR DEVELOPMENT FINANCE CALCULATOR
Common errors | Development finance for first time developers
Embarking on a development project as a first-time developer is an exciting endeavour, but it comes with a set of challenges that require careful planning and execution to avoid common pitfalls. One of the most critical aspects to consider is the accuracy of your cost estimates, which play a pivotal role in securing and maintaining your development finance.
Realistic Costing vs. Market Averages
When preparing your budget, it’s essential to calculate your costings against market averages. This ensures that your estimates are in line with what is currently expected and acceptable in the industry. Here’s why this is crucial:
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Minimum Profit on Cost (POC): Many lenders require a minimum POC of 15%. If you’ve underestimated your costs to make the project appear more profitable, you might be setting yourself up for financial discrepancies down the line. A Quantity Surveyor (QS) will be brought in to assess your costings, and the figures they approve will be the ones a lender uses to evaluate your loan application.
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QS Assessments: The role of a QS is to provide a realistic and professional estimate of the construction costs based on current market prices and construction standards. If their assessment concludes that your costs are under-budgeted, the lender may adjust the amount they are willing to finance, which could affect your POC and overall funding structure.
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Impact on Funding: Being unrealistic with your build cost estimates can lead to a reduction in the percentage of costs covered by your development finance post-QS valuation. This situation often occurs after you’ve already incurred expenses, potentially leading to a shortfall that you must cover out-of-pocket.
Avoiding Upfront Financial Wastes
For first-time developers, it’s vital to be as accurate and realistic as possible with your project costings from the outset. Here are some steps to ensure this:
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Engage with a Professional QS Early: Before finalizing your budget and project plan, consult with a QS to get an accurate estimate of the costs involved. This proactive approach can save you from unexpected financial adjustments later.
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Research and Use Market Benchmarks: Utilize current market data to benchmark your costings. This information can often be sourced from industry reports, building cost information services, or directly from consultations with industry professionals.
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Prepare for Contingencies: Always include a contingency budget to manage unforeseen expenses. Industry standards suggest a contingency of around 10-20% of the total project cost, depending on the complexity and risk profile of the project.
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Regular Reviews and Adjustments: As your project progresses, continuously review and adjust your costings in consultation with your QS. This will help you stay aligned with both market conditions and your financial projections.
Development Finance Jargon for First-Time Developers
As you embark on your journey into development finance, it’s crucial to familiarise yourself with specific industry terms that will be pivotal in planning and executing your project. Understanding these terms not only aids in crafting a robust finance application but also ensures you navigate the complexities of development finance with confidence.
Profit on Cost (POC): Profit on Cost is a critical metric that lenders look at when assessing the viability of a development project. It represents the profit you expect to make on the project as a percentage of the total cost. Most lenders require a minimum POC — often around 15% — to consider the project within their lending criteria. For first-time developers, accurately calculating the POC is essential to avoid unnecessary expenditure on finance applications and valuations if the project’s profitability is uncertain.
Loan to Gross Development Value (LTGDV): This term refers to the loan amount as a percentage of the Gross Development Value (GDV) of the project once completed. LTGDV is a crucial figure as it helps lenders assess the risk associated with the finance. It reflects the total gross loan compared against the estimated value of the completed development. A higher LTGDV can indicate higher risk, but it also means more leverage in the project.
Loan to Cost (LTC): Loan to Cost ratio measures the amount of the loan against the total cost of the project. This total includes all expenses related to the project such as interest, construction costs, land acquisition, planning permission, legal fees, and taxes. Typically, lenders will offer a maximum LTC of up to 90%, although some mezzanine lenders might offer up to 100% LTC under certain conditions. Understanding LTC is vital for first-time developers to ensure they do not over-leverage their position, potentially leading to financial difficulties if project costs overrun or market conditions change.
For first-time developers, mastering these terms and their implications can significantly impact the success of your development finance application and project execution. Ensuring you have a solid grasp of your POC, LTGDV, and LTC calculations will help you present a strong case to lenders and pave the way for a successful development venture.
Exploring Lending Options
Primarily high-street lenders, specialist banks, and short-term funding entities that hold the first charge. Usually these are the most cost effective lending rates, but they don’t tend to be the most generous with the following guidelines:
- Up to 60% Loan to Gross Development Value (GDV)
- Up to 80% Loan to Cost (LTC)
- 15-20% profit on cost required
- Experience required in the same scheme size
Therefore, the high street is usually a place for lending options only for experienced applicants. Below we will explain options available to first time developers, or borrowers with low collateral requiring extra funding percentages.
Ideal for when cash runs low but asset equity remains substantial. This is a loan charged above existing lenders as a subordinate, repaid upon project completion. Using Mezzanine finance alongside Development finance for first time developers, often introduces them to this flexible financial tool that can drastically increase cash flow and also rescue deals that are stuck in build phase.
The lending guidelines with Mezzanine funding tends to be:
- 75%-80% Loan to Gross Development Value (GDV)
- Up to 95-100% loan to cost
- No experience required
Specialist banking institutions and short-term lenders that offer increased LTGDV (Loan to Gross Development Value) secured with a first charge. This can be useful for borrowers looking to stretch their borrowing with low experience and a shortage of collateral.
The lending guidelines with Stretched Senior Development lenders tends to be:
- Up to 75% Loan to Gross Development Value (GDV)
- Up to 90% Loan to Cost (LTC)
- 15% profit on cost required
- No experience required
- Private investor funds permitted for deposit and up front costs
Some lenders finance the entire project, charging interest and taking a portion of the net profit (typically 50%) at the end. This often would not be a great product to use for development finance for first time developers unless the deal is quite profitable; often it works well for builders that want to have a go at their own scheme and are interested in development finance for first time developers.
High street lenders for first time developers
Generally high street lenders will require a level of experience on development schemes similar to the security of the proposed funding. Therefore, when we are looking at development lenders for first time developers we are steering more towards smaller funding institutions that have a more relaxed criteria surrounding experience. High street lenders typically require 2-3 years experience in the same sized scheme with a “developers CV”.
It is important that when applicants apply for development finance, as a first time developer that they create a borrowers CV following their completed scheme.
The Role of Asset Managers and Quantity Surveyors in Development Finance
Navigating development finance as a first-time developer involves interactions with key industry professionals like asset managers and quantity surveyors, each playing a crucial role in the successful management and execution of your project.
Asset Managers: Asset managers are instrumental in ensuring that the properties used as collateral for loans are maintained in optimal condition, thereby safeguarding the lender’s interests. They regularly assess the property’s condition and market value, ensuring any risks associated with the property are mitigated. For developers, understanding the function of asset managers can help in maintaining the property in such a way that it continually meets the lender’s criteria, thus avoiding any potential issues in funding continuity.
Quantity Surveyors (QS): Quantity surveyors are perhaps one of the most critical figures for a development project, especially for first-time developers. They provide detailed and accurate cost estimates for all aspects of a construction project, ensuring that everything from material costs to labour is budgeted correctly. A QS will help keep the project within financial limits by pre-empting potential overspends and reallocating budgets where necessary. They also play a pivotal role in the drawdown process of the loan.
Cost of QS Visits and Drawdowns: It’s important to note that quantity surveyors charge for each site visit they make to assess the progress of construction before approving further drawdowns of the loan. This fee can add up, making it crucial for developers to strategize the construction phases efficiently. Working with main contractors who can achieve more substantial parts of the work between each drawdown can be economically advantageous. This approach reduces the frequency of QS visits needed, thereby saving on the overall cost of the project.
Larger drawdowns allow more significant portions of the project to be completed before additional funding is required, which not only helps in managing cash flow but also aligns with achieving project milestones without constant financial interruptions. For first-time developers, forming partnerships with capable contractors who understand the importance of maximising work per drawdown phase can lead to smoother project progression and potentially lower project costs.
Collaborating Effectively: For first-time developers, understanding and effectively managing these relationships and processes is key. It ensures that projects not only stay within budget but also meet the necessary standards required for further financing stages. Successful collaboration with asset managers and quantity surveyors can lead to better managed and more financially viable development projects, reducing risks and enhancing profitability.
Mezzanine Funding Explained
Mezzanine Funding Explained
Mezzanine finance is a sophisticated financial tool often utilised by property developers to bridge gaps in funding. It is particularly relevant for scenarios where the available equity and debt from traditional loans do not fully cover the costs of a development project. This type of funding is crucial for maintaining momentum on a project, but it comes with nuances that first-time developers should understand thoroughly before engagement.
How Mezzanine Finance Works: Mezzanine finance is typically provided by specialist lenders and is structured as a subordinate debt, meaning it ranks below the primary or senior debt in terms of repayments and claims on assets. It is usually secured by a second or even third charge on the property, after the first charge held by the primary mortgage lender. In some cases, lenders may also accept additional security, allowing the borrower to raise debt levels beyond what would normally be permitted on a single security.
This form of financing is designed to be repaid at the end of the project, commonly after the primary loan has been settled, and typically coincides with the project’s exit through sale or refinancing. The terms of mezzanine finance often include higher interest rates than senior debt, reflecting the increased risk taken on by the lender.
Considerations for First-Time Developers: For first-time developers, it’s crucial to recognise that mezzanine finance should not be the first go-to solution when planning your project’s finances. If the initial figures suggest that mezzanine financing is necessary to merely start a project, it might indicate that the deal is too risky or not financially viable on its own terms. Ideally, developers should structure their financing in a way that mezzanine funds are not critical from the outset.
Mezzanine finance is best utilized in situations where unforeseen costs arise or when project expenses exceed initial projections, which can often occur due to market changes, construction delays, or unexpected site issues. In these cases, mezzanine financing can provide the additional cash flow needed to complete the project without halting progress. It acts as a financial cushion, giving developers the flexibility to manage cash flow effectively and navigate through financial bottlenecks.
Strategic Use of Mezzanine Finance: First-time developers should approach mezzanine finance as a strategic tool rather than a primary funding source. It should be reserved for moments within the project lifecycle where additional funding is required to push the project towards completion or to cover unexpected cost overruns. Utilising it in this way ensures that it serves its purpose without overleveraging the project financially.
In summary, while mezzanine finance can be a powerful resource in property development, it must be approached with caution, especially by those new to the field. Understanding its role, costs, and appropriate usage will help first-time developers make informed decisions that align with their project’s financial health and long-term success.
FREQUENTLY ASKED QUESTIONS
Development finance is a type of funding specifically designed to support property development projects, such as new builds, renovations, or conversions. It provides the necessary capital to cover construction costs and other associated expenses.
Development finance can be used for various projects, including residential developments, commercial properties, mixed use projects, and refurbishment or conversion projects.
The loan term for development finance usually ranges from 6 to 24 months, depending on the scope and timeline of the project.
A drawdown is the release of funds from the development finance loan. Funds are typically released in stages (drawdowns) as the project reaches specific milestones or completion phases.
The amount you can borrow depends on the project’s value, your financial situation, and the lender’s criteria. Generally, lenders offer up to 70-80% of the project’s gross development value (GDV) and up to100% of construction costs.
A personal guarantee is a commitment from the borrower to repay the loan personally if the project fails or the development company cannot meet its financial obligations. It provides additional security for the lender.
Yes, development finance can cover land purchase costs as part of the overall funding package, provided the land purchase is integral to the development project.
A monitoring surveyor is appointed by the lender to oversee the project’s progress, ensuring that the development is on track and that funds are being used appropriately. They provide regular reports to the lender.
An exit strategy is a plan for repaying the development finance loan. Common exit strategies include selling the completed property, or refinancing with a long term buy to let mortgage.
Risks include project delays, cost overruns, market fluctuations, and potential difficulties in selling or refinancing the property. Proper planning and risk management are essential to mitigate these risks.
Development finance is available to both experienced developers and first time developers. Lenders assess applications based on the viability of the project and the developer’s ability to manage and complete the development.
Development finance is tailored for property development and is typically short term, covering the duration of the construction project. In contrast, a standard mortgage is a long term loan for purchasing or remortgaging an existing property.
Development finance is often structured in stages, with funds released in tranches as the project progresses. This ensures that the developer has the necessary funds at each stage of construction while minimising the lender’s risk.
Lenders will require detailed information about the project, including planning permissions, architectural plans, cost estimates, a project timeline, and the developer’s experience and financial standing.
Gross Development Value (GDV) is the estimated market value of a property or project once it has been completed. It is a crucial metric used by lenders to determine the amount of development finance they are willing to provide.
Yes, there are typically upfront costs, including arrangement fees, valuation fees, and legal fees. These costs vary by lender and should be factored into your overall project budget.
Interest on development finance is usually charged monthly and can be either rolled up (added to the loan amount) or serviced (paid monthly), lenders however prefer the facility to be rolled and therefore paid on redemption. The interest rate varies based on the lender and the project’s risk profile.
Yes, first time developers can obtain development finance, although they may face stricter criteria and higher rates. Partnering with experienced professionals or providing a solid business plan can improve your chances of approval.
The approval process for development finance can take anywhere from a few weeks to a couple of months, depending on the complexity of the project and the thoroughness of the application.
Mortgage Lane specialises in helping first time developers navigate the complexities of development finance. We provide expert advice, prepare detailed applications on your behalf, and connect you with suitable lenders to secure the best financing options for your project. A lot of our brokers are developers too, so they understand the application process as a customer also!
Speak to a Development Finance Advisor Today
- Mon – Fri 9am to 6pm
- Closed Sat & Sun
- Call us for an appointment or fill in the contact form on this page
- Call: 0333 231 8206
- Email: enquiries@mortgagelane.co.uk
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