Development Finance: A Bespoke Product For All Purposes
At the risk of contradicting the above, to call development finance a ‘product’ is, in the traditional sense, inaccurate. This is because development finance is technically a broad and expensive product category, within which bespoke solutions are arranged to suit the borrower’s requirements.
Development finance offers the kind of flexibility that can accommodate the vast majority of larger-scale property development, conversion and construction projects; examples of which include repurposing entire properties, partially or completely demolishing properties to be rebuilt from the ground up, or transforming the early properties into luxury multi-purpose developments.
Importantly, development finance affords developers the opportunity to cover up to 100% of the total costs of the project - without eating into their own capital. As established developers often aim to have several projects on the go at the same time, this alone can make development finance a uniquely beneficial financial tool.
100% Project Costs Covered
The initial loan issued by a development finance specialist is referred to as ‘senior’ development finance, which is usually offered with a maximum LTV of 85%. This means that the primary loan secured against the development can be taken out to cover no more than 85% of the total project’s costs.
Another slightly different form of development finance is offered by some lenders, referred to as ‘stretched’ senior finance. This is where (under special circumstances) a lender is willing to increase this maximum LTV to around 90%, leaving just 10% of the project’s costs to be covered by the investor.
Again, property developers and investors often seek to minimise the direct investment of their own capital, in order to enable them to execute multiple projects simultaneously.
Whether the initial loan taken out is a standard senior development loan or stretched senior finance, the remaining funds do not necessarily need to be provided by the developer. There is also the option of seeking ‘mezzanine’ finance - a facility used to top up an initial development finance loan, which sits behind the first legal charge of the senior lender.
Second-Charge Borrowing
Mezzanine finance can be used to take the developer's total borrowed funds from the initial 85% or 90% right up to 100% of the project’s total costs. A mezzanine finance facility will usually be sought from a separate lender to the first product, issued as a second-charge loan against the borrower’s assets - usually the development itself.
While mezzanine finance can be affordable in terms of monthly interest and borrowing costs, it is a facility which is usually issued on the condition that the lender takes a proportion of the final profits on the development from the borrower. This is not always the case, but some mezzanine finance facilities include a clause wherein up to 50% of the developer’s profits are claimed by the lender, upon completion of the project.
This is one of many reasons why it is essential to seek independent broker support, before applying for development finance. Irrespective of your target LTV or the nature of your project, broker support always paves the way for an unbeatable deal and the flexible terms you need to successfully complete your project.