Finding the finance for development projects
Available throughout the UK are great deals to be had for development land that can be used for both residential and commercial developments. These deals can be even better for sites where planning has lapsed or in the process of being provided. However, buying a development site, building on it and then selling the residential properties or commercial units once completed isn’t as easy as often thought and more importantly those hefty profits that can seem very apparent at the start can quickly disappear!
Anticipated building costs can quickly increase, right from the start of the project if ground works turn out to be more expensive or problematic than expected. Any unforeseen problems will quickly add to the build cost and therefore reduce the anticipated profit.
If the cost calculations and budgeting was optimistic and worst of all very tight, then a development project can quickly run out of money and grind to a halt. Hence the reason why there are so many development projects throughout the UK that are for sale part way through the project.
When looking to fund a development project, the options available are refinancing other properties and assets through commercial and buy to let mortgages, or raising finance using the development site itself through the use of bridging loans or development finance.
A bridging loan provider will base their lending on the open market value of the plot. As building commences and the value increases there is the opportunity to increase the amount being financed. Rather than using bridging loans as a method of funding, development finance is more tailored to suit this type of lending. A development finance provider will lend based on the value of the land, the build cost and the end value of the project. This is very useful to developers because it allows them to raise a higher proportion of the finance required. With development finance, funds are released at the start to help fund the purchase of the land if it is not already owned, then in stages during the build process.
For projects where the amount of money being put in is limited by the developer there may be the possibility to raise mezzanine finance. This is a facility that would be used in addition to the money being provided by the principal development finance provider who would be taking first charge on the property. The mezzanine finance provider will take a second charge. Both finance providers will charge interest on the money being lent to the development, however mezzanine funders will tend to charge a smaller amount of interest but will also require an agreed percentage of the development profit in return for providing the mezzanine finance.
Lenders who provide development finance will usually only lend to experienced developers, or for projects that are employing or involving a suitably experienced developer. Mezzanine finance providers tend to only lend to experienced developers with a successful track record.
Having completed the development it is then important to either sell the properties or find an end user as quickly as possible, remembering that for as long as the development finance facility is still outstanding that interest is being charged.