Property Finance

There are various types of development finance, each structured to cater for the requirements of the particular project. It offers a longer-term funding arrangement specifically tailored to funding construction projects. The term length will depend on the timeline for the proposed construction but often will be available for up to 3 years. It is common for a development facility to release funds in various stages under a land and build facility. The land loans provides funds to acquire the site with the build facility providing staged draw downs to enable to the build to progress.

The main types of development finance are as follows (but not limited to):

Senior Debt/First Charge – these lends generally have a lower loan to value of the gross development value although this varies depending on the lender, and the developer.

Stretched Senior Debt – this can be useful when you need additional funding over and above your senior debt or have more than one project ongoing at the same time. Generally speaking a lender will only offer this type of lending to an experienced developer with a proven track record.

Mezzanine Finance – this type of finance can help maximise total borrowing. It is a second charge and can help to contribute towards the amount the developer has to contribute towards the project. It is often more expensive but offers a solution for many developers.

Development Exit Finance – this becomes relevant when you may want to refinance a project or when you are approaching the end of your initial loan term but not yet able to complete the sale of the units on the development.

Over and above the typical facilities for new construction sites, developers should also consider if heavy & light refurbishment lending is appropriate. These facilities cover conversion works to existing buildings. As they are perceived to have a lower risk profile, lenders can take a different approach to leverage.

Bridging finance, as it is commonly referred to, offers a short term flexible option for developers requiring to ‘bridge’ the gap before the next funding comes in. Typically, the term of the loan will range from a few months to 18 months. This type of finance is generally used to fund small scale construction projects and renovations, that can be completed quickly and within the term of the loan or until a longer term facility can be put in place.

Due to the shorter term of the loan, lenders’ requirements tend to be reduced and the funds can be made available at short notice – this can even be as little as 24 hours, depending on the lender (and the team of professional advisors supporting the deal)!

For all the benefits that a bridging loan can offer, there are substantial fees and interest charges which as always need to be weighed against the convenience and speed. It is usual to see a higher interest rate, an arrangement fee (often a percentage of the loan), a broker fee and of course legal fees.