Funding construction and renovation projects through bridging and development loans
When looking for finance to fund renovation or new build projects, bridging loans are often a popular option. Bridging lenders will lend according to the current value of a site or property and many bridging loan providers are happy to lend on land, building sites and property that is in need of restoration. Because other lenders are reluctant to lend on property that is in need of construction or restoration, this is an important reason why bridging loans are often used to fund building and restoration projects.
Once the work has been completed a developer will either sell the completed property and the proceeds used to repay the bridging loan, or alternatively they may refinance it with a more traditional method of finance.
Bridging loans are arranged based on the current market value of the property. When construction and refurbishment work is carried out correctly the property is likely to increase in value as work progresses. However any bridging finance taken out to fund building and restoration work would have been taken out based on the property value at the time of receiving the finance. This can often restrict the amount of funding that can be received for a project.
Development finance is similar to bridging but is a more specialist method of finance used for funding building projects. With development finance the lenders will take into consideration the value being added to a project as work commences and progresses. This allows them to release more funds than would have been available through bridging finance. In addition development finance allows for funding to be arranged over longer periods than is possible for bridging, and can also save customers interest charges because funds can be drawn down from the lender as they are required.
Developers will also need to contribute finances into any project. This could also be in the form of equity owned in the land being used for development or perhaps equity in other property. When a developer is unable to contribute the amount of equity required by the development finance provider, there may be the option to use mezzanine finance.
Mezzanine finance is available to experienced developers and is a method of raising additional finance for new build developments, major restoration and conversion projects. A mezzanine finance provider will provide funds and take a second charge behind the principal development finance lender. At the end of the project they will expect their money back in addition to a small amount of interest and also a percentage of the project profits. Their share of the profits would have been agreed before hand, and will be in proportion to the amount of risk involved.