Development Finance | First Time Developers
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.
Exploring Lending Options
Exploring all types of development finance, including those not available to first time developers and why.
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.
Development Finance Jargon for First Time Developers
Dive into development finance, and you’ll encounter terms that might be unfamiliar. Some include:
Profit on cost (POC) lenders will usually require your scheme to have a profit of cost such as 15% to be within criteria. If you are looking for development finance as a first time developer then it is important to get your numbers accurate to make sure you don’t spend money commissioning finance applications and valuations where there is uncertainty of profitability.
LTGDV (Loan to Gross Development Value): Reflects the total gross loan, against the estimated value of the whole, completed development.
Loan to Cost: The percentage of loan against the total cost of the project inc interest, building works, land or building purchases, planning, legal and tax costs. A lender will generally have a max loan to cost of 90%, apart from some mezzanine lenders that may go to 100% LTC.
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
Development finance for first time developers also brings them face-to-face with asset managers and quantity surveyors. While the former ensures properties used as loan security are in prime condition, the latter offers precise cost estimates for construction, ensuring projects stay within budget.
Mezzanine Funding Explained
A popular choice among first-time developers, mezzanine finance bridges the financial chasm between available equity and higher debt levels. Offered by specialist lenders, it’s a subsequent charge that’s repaid once the project is set for exit, either through a sale or refinance. Often these lenders will require a 2nd or 3rd charge on the property offered as security and in some cases, might also accept additional security to raise debt levels beyond normal levels permitted on one single security.
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!