How to fund property development

By Fifty21 Media

29 Nov 2022

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Property development finance is the infusion of capital that is made possible via the use of development financing, a kind of short-term borrowing, is intended to facilitate the building of residential and commercial properties or the renovation of existing ones. Term loans, mortgages, and mezzanine financing are all included in this category.

How does development finance work?

Development finance works by the lender giving money to acquire the property and the money to perform the building work.

Most lenders who specialise in development financing will first provide a loan based on the acquisition price. Following that, the lender will pay for all of the work's costs, but in arrears.

Once the building work has begun, the customer is responsible for funding the initial portion of the expenditures.

The next month, the developer will send an invoice to the bank surveyor. The bank surveyor will verify that everything is accurate, and after this is done, the bank will finance the customer. This is what it means to be in arrears. This makes certain that the works are finished, the development is finished, and is now ready to be sold or refinanced.

The value of the finished property is factored into the calculation of the loan amount in development financing, which differs from regular loans. Because of this, it is possible for investors and builders to put money into projects that would otherwise be out of their price range or beyond their grasp.

How to finance a development project

You should assemble a team of experts, including an architect, structural engineer, and planning consultant, before asking for development financing. This is essential for your growth objectives and loan application credibility.

Though specific needs may vary from lender to lender, most will demand the following bare minimums:

Detailed cashflow Detailed work schedule with the building contractor Detailed development plan timetable - week by week Confirmation of planning approval with conditions that must be completed before you can begin construction, and lenders must certify that this has been met before releasing cash to the client.

How to Obtain Development Funding

Companies often use the services of a finance consultant or broker to help them through the complex and time-consuming process of applying for development financing.

The broker's job is to smooth things over and make sure the due diligence is thorough and sound enough to withstand scrutiny. Having a broker evaluate your application and make sure all the information is correct and the necessary documentation is included may save you and the lender a lot of time.

What exactly is a development financing institution?

A development finance institution (DFI) is a financial lender or funding partner that assists with building financing.

High street banks and other senior lenders will provide the bulk of the funding, less the client's initial deposit.

Some alternative lenders provide development financing in their suite of offerings. Lenders may be sorted into two groups: those who focus on general lending and those whose main expertise is development financing.

Advantages of Property Development Finance

One of the main advantages of development financing is that it makes it possible for borrowers to have access to significantly bigger quantities of money. It's the largest borrowing option in the UK right now. The initial phase of a project is typically funded by a grant or donation. The developer receives more funding as the project progresses, expands, and gets closer to completion. There are no hard limitations on the amount that may be borrowed, although the maximum amount that can be borrowed is 100% of the entire cost of construction.

The following are additional benefits of development finance:

The capacity to acquire financing for homes, plots, and developments that other lenders would deem inappropriate or unviable. This comprises decaying and abandoned structures. Rapid repayment of development financing helps keep interest rates and other borrowing costs low. This method of borrowing money is far more reasonable than other long-term options. Only the money disbursed is subject to interest charges, which again may have a favourable effect on the facility's overall operating expenses. An advantage of the project's funding being released gradually. There are no explicit restrictions on the maximum loan amount. Regardless of the overall construction cost, development funding may be granted to pay up to 100% of the expenditures if the project is judged viable.

Strictly speaking, a broker is unnecessary if you plan to apply for development financing. The consensus, however, is that this is a sound plan. Lenders underwrite each project separately because of the vastly varied nature of each one. An intermediary like a broker can make sure the terms a lender proposes are truly beneficial to you.

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