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FINANCING FOR PROPERTY DEVELOPMENT TIPS
MAKE SURE YOU DO YOUR RESEARCH
The golden rule of any property development project is to make sure you leave no stone unturned in your initial due diligence. Which are the up and coming areas? If there’s a big university in the area, where do the students live? Where are the good schools? Does it have adequate public transport? For larger and more complex schemes, a feasibility study will need to be conducted by a major surveyor, in order to ascertain a detailed understanding of the local micro factors and larger macro factors that could affect the project’s viability.
This way you won’t be building a luxury property in an area that really needs affordable homes for first-time buyers or key workers, or building student accommodation in an area that already has an oversupply.
- Be realistic, on everything. Hope for the best but always plan for the worst.
- Be realistic on your experience level. If you attempt to get development finance for a property project that is far outside your previous experience, then the chance of success will be slim.
- Be realistic on the value assumptions that you make. Most RICS surveyors won’t share your optimism, and the hoped for value by the local estate agent also has to be taken with a pinch of salt.
- Be realistic on the cost. Again, hope for the best, but plan for the worst. Most lenders will require a 10% contingency added to the costs and will require a quantity surveyor to look over your estimates.
- Be realistic about how long it takes to get development funding. Finance can take up to 3+ months for highly complex large scale developments. For smaller developments, 6 weeks is achievable for the average property project.
USE AN EXPERIENCED DEVELOPMENT FINANCE BROKER SUCH AS LOANX
It is almost impossible for anyone other than an experienced specialist development finance broker to truly take advantage of the opportunities found in such a fragmented finance arena. There is a myriad of specialist lenders, small niche lenders, private investors, family offices, hedge funds, venture capital firms, private equity funds, peer to peer networks and banks. Without being fully immersed in the sector, you would never know you are getting the best finance option possible for your property project.
Of course, there are other benefits when you use our services. The huge amount of documentation required for a development finance application can be daunting. An experienced broker such as LoanX will prepare a professional funding memorandum to ensure your property project is seen in the best light possible by the lender, ultimately saving time, money and effort.
PLANNING PERMISSION & PLANNING CONSENT
When borrowing to convert former commercial properties to residential, it is often possible to take advantage of specialist planning consent via Permitted Development Rights, especially if the work is internal only. Although consent is still required, it is much easier to attain than submitting a fresh planning application.
If you do need planning permission, it is advisable to arrange it before looking for funding, as most lenders will require sight of the consent before they will review the lending proposal.
JOINT VENTURE WITH THE LANDOWNER
If you are fortunate enough to know a landowner who owns land whose use could be changed for new build development, then pitching a JV to them could be a lucrative option.
If you bring an unencumbered plot of land with planning to the table, most lenders will offer development finance up to 100% of the build cost. It’s up to you then to negotiate with the landowner on the profit split.
TAKE CARE WHEN CHOOSING A MAIN CONTRACTOR
As well as carefully reviewing your credibility as a developer, the development finance property lender will also pay close attention to the main contractor, both their financial strength and their experience in delivering schemes of a similar nature and scale in the recent past.
The lender will want to ensure that the main contractor is:
- Experienced in the type of construction method that you are proposing
- Is used to working at the scale you propose
- Is familiar with any unique challenges your scheme may face i.e listed building or non greenfield construction
- Has 3 years of profitable accounts and a strong balance sheet
- Has cashflow sufficient to float 1 or 2 months costs if necessary
PLAN YOUR EXIT STRATEGY
You may wish to hold the completed asset as an investment, so refinance is what you will be looking for. If that is the case, then the lender may ask for evidence that the completed project meets the exit finance providers criteria i.e a mortgage agreement in principle (AIP).
If selling or leasing a commercial asset, you may be asked to provide heads of terms or a letter of intent from the proposed end user, such as the lease agreement for an office, or the contract for a hotel operator.
However, if you are looking to sell the completed development scheme once built, then there are several options available, such as the off plan presale to a local housing authority or a specialist block purchase buyer, often “forward funded.
Whatever the development exit route chosen, be sure that you have done your research.
CLIENT CASE STUDIES
DEVELOPMENT FINANCE FAQS
What is Development Finance?
How do I calculate build costs?
Can I use a development loan for heavy refurbishment?