Development finance is a specialist form of lending for property construction, improvement, and general development projects. It is typically issued in sums of £50,000 or more, released in stages as the project progresses.
Along with being a highly flexible facility, development finance also has the potential to be uniquely cost-effective. But what specifically do lenders look for when considering development finance applications?
What are the main criteria that will determine whether an application for development finance is successful?
The maximum and minimum loan sizes available will vary from one lender to the next. Just as some will issue loans starting from around £10,000 or less, others will consider applications for more than £1 million.
What matters most is ensuring that the loan amount you apply for is suitable for your requirements and viable for your budget. More often than not, development finance specialists will limit their maximum loans to 70% of the project’s value – aka 70% LTV.
Timeframes for development finance also vary from one lender to the next. Depending on the lender you choose, you could be looking at a flexible repayment period of 12 to 36 months. During which, early repayment should be possible with no penalties incurred.
Longer-term loans are also available for more extensive projects, along with shorter-term bridging loan solutions for shorter initiatives. Your broker will provide you with a full overview of the options available and help you choose the most appropriate loan to suit your requirements.
One of the most important criteria that must be fulfilled is the provision of evidence of relevant experience in the field. Borrowers with an established track record are naturally considered lower-risk clients than those starting from scratch.
Of course, this does not necessarily mean you will be counted out of the running as a newcomer to property development. It simply means that if you cannot provide evidence of relevant experience, you will need to convince the lender of your suitability for development finance in other ways.
The Nature and Location of the Development
You can also expect your lender to scrutinise the type of property you intend to develop and where it is located. It is the value of the property as a completed project that the lender will be most interested in. As location tends to be the biggest determining factor where property values are concerned, the project’s location will be a highly influential factor.
Once again, this does not necessarily mean you will be refused funding if looking to fund a project in a less desirable area. Ultimately, what matters to the lender is ascertaining whether or not the borrower will definitely be able to afford to repay the loan.
Planning Permission Requirements
Any planning permission requirements for the project to go ahead must be fulfilled before applying for development finance. It is highly unlikely that your request for funding will be granted if you have not yet received all the necessary permits.
This is simply due to the fact that obstacles faced with planning permission or building regulations could complicate, delay or result in the cancellation of the project. All such formalities must therefore be taken care of in advance, prior to applying for funding.
A Concrete Exit Strategy
This refers to evidence provided by the borrower regarding when and how they will repay the loan. Examples of exit strategies include selling the completed development, renting out units within the development, or transferring the loan to a longer-term product.
Your exit strategy must also take into account all possible contingencies and challenges that may be encountered along the way. The lender needs to know that come what may, they will definitely get their money back – in full and on time.
They will also need to have total confidence in the feasibility of the project as a whole. Property development projects are often highly ambitious, involving a wide variety of risks for those involved. For the lender, what matters is the provision of evidence that the project will be successful.
As part of the application process, you can expect to be asked numerous questions about the feasibility of the project and the extent to which you have planned for all possible contingencies. It is in their best interests to scrutinise every detail, so be ready to answer some challenging questions.
Development finance is always issued in stages as the project progresses. It will therefore be essential to provide a detailed and accurate development schedule, outlining what you intend to achieve and when.
This will subsequently be used as the basis for your bespoke development finance product. An agreement will be reached with your lender regarding how much of the loan will be released at each stage of the project, along with what kind of evidence will need to be provided to prove that the project is progressing as planned.
In 2021, Global Economic Growth was 5.5%. But the latest UN Report predicts only 4% Global Economic Growth in 2022,...Read more