Property development finance - a background briefing
Fri, 26 Oct 2007
Property development is a specialist area. We would recommend that you call us to discuss any potential development opportunities with our experts so that we can advise on the appropriate financing arrangements and therefore the details given below are restricted to the broad outlines only.
The funding options available generally fall into three categories:
· specialist property development funding products for developers;
· property development JVs for owner occupiers;
· normal property borrowings by way of commercial mortgage or bridging.
The specialist development loans are mortgages designed to fund developments. A normal lender’s approach might be to advance:
· 60% of the site value; and
· 100% development costs which becomes available to drawdown to pay for the build on submission of applications (interim valuations of the work conducted).
This lending is typically subject to an overall limit of 60% to 70% of the expected value of the completed development. A developer using this type of facility will therefore need to be able to raise 40% of the site purchase price from their own capital.
There are however a further set of lenders who may be able to provide the missing 40% by way of ‘mezzanine’ finance and there are also a few lenders who are now looking at providing 100% funding for property development transactions, although these tend to be targeted at experienced small developers and are restricted to smaller deals (with gross development value under £3m).
Lenders will be interested in understanding the planned sales process from the completed development, whether agents have been instructed and whether units are expected to sell off plan or on completion (as obviously the more units pre-sold, the lower the lender’s risk).
Over and above this however local lenders can take a flexible approach to financing deals by way of partnerships so it is worth talking to our experts to see what deals can be negotiated.
There are some specialist development loans meant for owner occupiers who wish to develop say a commercial property for their own use. These operate much as above but then convert into a normal commercial mortgage on completion of the build.
In some cases an owner occupier will hold a property which has development potential but does not have the capacity in house to develop the site themselves.
These situations can be resolved by entering in to a joint venture with a developer. A typical case might involve a business owning a large factory site which has potential for retail development. One way of realising this is to agree a deal with a developer that they or a company set up for the purpose (a special purpose vehicle or SPV) which will purchase the site and grant the business a lease of say 2 years within which the developer seeks planning permission at the developer’s cost. On gaining permission, the developer builds an alternative site for the business on a new site which is let to the business on a normal institutional 15 or 25 year lease while the developer then develops the site, with the original owner having a share in the development profit.
Alternatively, funds can be raised for development by way of normal mortgages or commercial bridging loans against this or other properties. As bridging can be against property value rather than purchase price in some cases it is possible to cover 100% of the purchase price by way of a bridge.
If this is of interest please contact us to discuss your requirements.
