Different ways to fund a property development
There are various methods of finance for property development and the options available will depend on the type of project, the amount of funds being put into the project by the developer plus the past experience and expertise of the people involved in the project. These different funding options include bridging loans, development finance, joint venture funding and mezzanine finance. Most developments will use one or a combination of these options in order to provide the funds required to carry out and complete the project.
A popular method for financing new building and refurbishment projects are bridging loans, which are particularly useful for people who are looking to fund their first project. Bridging loans are a useful method of raising the short term finance required to modernise or refurbish an existing property that is already owned by the applicant. They are also commonly used to build new property that is on the applicant’s existing property, having obtained planning permission to build within their grounds. An important reason why bridging loans are a popular source of funds for this type of project is because they are more flexible when it comes to the past experience of the applicant, whilst providing a cost effective short term method of finance that will be repaid once the property has been completed and sold or refinanced.
For more experienced property developers an alternative method of raising funds is through development finance. This is similar to a bridging loan only more tailored to property development in that the amount of money that can be raised can be greater because funds are released based on the existing value of the development, build costs and the value of the property once it has been finished. In addition development finance can prove more cost effective because funds can be released in stages as they are required, therefore saving in interest charges.
When looking for development finance a lender will require an investment from the developer. This can be through capital put into the project or equity from another property that can be used as security. When there is a shortfall in the funds required to carry out a development project this can sometimes be solved through the use of mezzanine finance. A mezzanine finance provider will only invest if they can see that a project looks like it has an excellent chance of being profitable. This is because they are taking second charge behind the development finance provider and are therefore taking a much greater risk. In return for their investment they will either charge a higher rate of interest, or take a percentage cut of the profits once the development is finished. Providers of mezzanine finance will usually only consider lending to developers who have considerable experience and a proven track record of producing profitable developments.
Similar to mezzanine finance is joint venture finance or funding. This will involve a third party putting in capital and in return taking a percentage of the development’s profits. Joint venture finance can be limited to experienced developers, however if a project looks particularly attractive packages can be put together for developers with little or no experience, that involve development finance providers together with joint venture finance, because the joint venture provider will also supply the experience required.