Top 5 things to consider when obtaining funding for property developers
If you’re planning to start a property development project, you’re going to need some funding from lenders to get the project rolling.
But obtaining funding for property development projects can be a complex and challenging process. There are various requirements, and it’s essential to have a clear understanding of what is required to secure funding.
In this blog post, we will explore the top five things to consider when seeking funding for property development in the UK.
Your track record and property development experience
Before obtaining funding, it’s important to have a track record of successful property development projects or have partners on your team that have. Lenders will want to see that you have experience in the industry and can demonstrate a good track record of completing projects on time and within budget.
Having a successful track record in the property development industry can help to build trust and confidence with lenders. It can demonstrate that you have the skills, knowledge, and experience to successfully complete a development project.
It can also increase your chances of securing funding at more favourable terms and conditions. So provide them with details of previous projects, including their location, size, and profitability.
If you have no experience in the sector it’s important to partner with someone that does or even to partner with a lender.
2. The types of funding available
There are several types of Finance available for property development in the UK, including:
Senior Debt Development Finance:
Senior debt development finance is the first change against an asset. The finance covers typically 100% of the construction costs and provides part of the money required to purchase the property or its existing estimated value. This type of development finance usually goes up to 50-65% of GDV.
First charge / senior debt – This term is used to describe the finance from the lender who first lends money against the asset (land and property). This does not mean that no other lender can lend against the same assets later on. If another lender does lend against the same asset, then this is called a second charge.
GDV – The gross development value is the development’s sales value once all works are completed, and building completion certificates are gained.
Mezzanine Or Junior Debt Development Finance
Mezzanine development finance is a second charge against an asset. The mezzanine finance can usually take the overall lending up to 80% of GDV. The solution is often used by developers who want to top-up the level of finance on a development project, typically to improve cash flow and consider additional development projects.
Second charge / junior debt – This term is used to describe a second loan secured on the asset. The finance is offered by a different lender to the one who provided the first change. Should the development project fail for any reason, then the senior debt takes precedence over the junior debt.
Stretched Senior Debt Development Finance
Stretch senior development finance is a first charge loan like a senior debt. However, it offers lending to the value of senior debt and mezzanine debt combined, typically 70-80% of GDV. The benefit to the developer here is that there are fewer associated costs, with one set of lawyers and one valuation, which also speeds up the process for the finance being approved.
Heavy & Light Refurbishment finance
These loans are like senior debt loans for existing buildings rather than new-build construction. Lenders can be more aggressive on leverage here as conversions are perceived to carry less risk
3. The feasibility of your development project
It’s important to have a clear understanding of the financial feasibility of your development project before seeking funding. This can help you demonstrate to the lenders that you have a solid business plan and that the project is likely to generate a profitable return.
You can assess the feasibility of your development project by conducting market research, including analysing the demand for your development.
You’ll also need to estimate the costs involved in completing the project, including the purchase price, build costs and any associated fees.
4. The security and collateral requirements
When you’re trying to obtain funding, you need to provide lenders with some kind of collateral or security, which can include the land itself, other properties owned by the company or it’s directors and cash.
You need to weigh the risks and benefits of each of these collateral or security options to make sure you’re choosing the best option for you.
Lenders will typically require a minimum of 50%-60% of the plot purchase price. This can be secured against exiting properties , given the no cash down deal or by injecting the cash equivalent into the project.
In some cases smaller lenders, such as family offices or ultra-high worth individuals may want a equity stake in the venture and the developer needs no other physical collateral to be secured. In these instances the profits after interest charges and divided between the lenders and the developer.
5. Your option of seeking assistance from professionals
Obtaining funding for property development can be a complex process, and it’s essential to have professional advisors on your side.
Having professional advisors can help to ensure that you are following the correct legal procedures and that you have a solid financial plan in place. They can also provide guidance on the type of funding required and help you secure the most favourable terms.
For example, you can seek assistance from a solicitor to review the legal documents, a surveyor to assess the property’s value. You can use an accountant to provide tax advice and a mortgage/finance brokers to help you understand different financing options.
Ask a finance broker for help with financing your property development project
Figuring out how to get sufficient funding for your property development project can be difficult to do on your own if you don’t know what to look for. That’s why you should consider asking a mortgage/finance broker for help.
A good broker will have access to development funding lines that aren’t available on the open market. They will be able utilise relationships with family offices or high net worth individuals they work with, along with high street and challenger banks. A good finance broker will negotiate with lenders, find the perfect deal and more. Contact a mortgage/finance broker service in your area today.