- 9th January 2020
- Posted by: DMM
- Categories: Development Finance, Lenders
Finding and securing the ideal property development site is an achievement in its own right and certainly not easy but securing the right development finance terms is equally important. Many a potential development site attracts a strong gross profit that can be quickly eaten away by high lender rates. Consequently, understanding the best development finance terms and how these may affect your projects is critical.
There are now many dozens of specialist property development lenders in the market and each one of them have a range of individual lending products to choose from. Whilst this range of options does mean that there are competitive development finance terms available, lenders may be stringent in their qualifying criteria.
Navigating the application process may also offer its own challenges but success in securing finance is often down to knowing the right people to speak to and supplying the right information in the right way. So, with perhaps over 200 lending products to choose from, where do you start? First of all, it is worth understanding what development finance is, the types of rates available and why development finance terms vary.
What is Property Development Finance?
Development finance is a short-term loan provided to developers to fund a property project. Such projects may include the refurbishment of an existing building, a conversion of a former commercial property into residential or a new build from the ground up. The lenders property development finance terms will include the acquisition of the land, the construction costs, associated professional fees and, of course, the selling costs.
A lender will, as part of their development finance terms, secure their loan against the land being lent against as well as further guarantees. The development finance terms will vary depending upon the type of lending product and these can be summarised into the following key types:
There are other specialist facilities available such as VAT Bridging loans too.
How Do Development Finance Terms Vary?
Typically lenders will determine their development finance terms based upon the funding risk they are taking on a particular loan. For example, where a lender is providing say, 65% loan to cost, they will have a first charge level of security and their development finance terms will be single digit, perhaps 7%p.a. However, when this loan to cost is as high as say, 90%, then accordingly the lenders development finance terms may range anywhere from 8%p.a. to 21%p.a.
Mezzanine development finance terms will be even higher perhaps as much as 24%p.a. This is because the lender is usually in a second charge position and thus increasing their risk significantly.
Lenders will also determine their lending terms individually to a deal depending upon their overall appetite for a project. Such appetite will be affected by the geographical location of the project, the type and size of the development as well as the perceived ability of the developer to successfully complete it.
What Other Fees Form Part Development Finance Terms?
In additional to the core development finance terms, a loan facility will attract a number of other potential costs. Within the initial application process lenders will charge an initial commitment fee together with their legal costs and for the formal valuation report. Upon the completion of the loan the first drawdown will also attract an arrangement fee which is usually from 1-2% of the facility. The arrangement fee and then, upon repayment, an exit fee, will usually be calculated upon the gross loan amount. In other words, the lender will add fees and interest into their loan and then charge for the arrangement and exit fee based on the total facility.
Might There be Hidden Charges?
The majority of specialist property development lenders will be transparent with their heads of terms and make all charges clear. It is worth noting, however, that interest may be charged on either a simple or compounded basis. Compounded development finance rates can escalate very quickly! The aforementioned exit fee (often charged from around 1-2% of the facility) is more often than not calculated based on the gross facility but some lenders may base it upon the net facility or even the GDV.
Non-utilisation fees may also be built into your development facility. Lenders will have calculated how much interest they will make from a loan and so should a developer run into delays to their drawdowns, a non-utilisation fee may come into effect.
Finally, lenders will be carefully monitoring the progress of your build via their Quantity Surveyor (QS) and, therefore you will more then likely be charged a QS monitoring fee upon each drawdown.
Property development, as with any business, is all about maximising your profit and so securing the right lending product is very important. If you are seeking the best development finance rates then you can search and compare property development finance here!
Developer Money Market is an independent specialist broker and can help you search the huge choices of commercial development finance terms available. Our online system can instantly match your loan requirements to suitable loan products and save you lots of time and hard work. We are not associated with one lender and, therefore, will assist you in making speaking to the right lenders and providing the information they need to make a quick decision!
Alternatively, if you prefer, we can act for you in a traditional brokerage capacity to manually structure finance to meet your requirements. If you have any questions then we are here to support you; simply email us here at [email protected].