Property Development Finance Explained

Property Development Finance Explained

What is property development finance?

Property development finance is a cornerstone of the real estate industry, providing the crucial support developers need to bring their projects from blueprint to reality. This specialised form of financing is designed as a short-term loan, tailored to cover the comprehensive costs of land acquisition and construction. It serves as a vital bridge between the developer’s equity and the total project costs, ensuring that financial limitations do not hinder progress.

The Essence of Property Development Finance

Each property development finance structure is unique, reflecting the specific needs of the project, including scale, risk, and duration. Typically secured against the property itself, the loan is released in stages aligned with the project’s milestones, balancing risk for the lender and cash flow for the developer.

Financial Instruments for Developers

Developers have access to various financial products, each suited to the different borrowing requirements and size of a development:

·       Property Development Finance: Typically, property development loans can be used for a borrowing requirement of £750,000 to £50,000,000 with a loan term of 9 to 36 months.

·       Bridging Loans: Typically, bridging finance can be used for property development projects with a borrowing requirement from £50,000 to around £2,000,000 with a loan term of 3 to 24 months.

Lender’s Loan Approval Criteria

Lenders assess development finance applications based on several factors:

·       Experience: The developer’s experience can be critical for loan approval, however, first-time developers can still be successful in attaining development finance but should surround themselves with an experienced team of professionals such as Architects, Surveyors & Valuers, Engineers, Lawyers and an experienced commercial finance broker.

·       Project Viability: A solid business plan demonstrating profitability and a well-defined execution strategy is essential.

·       Investment Strategy: The developer’s investment approach must align with market trends and project goals.

·       Exit Strategies: It’s crucial to have a well-planned exit strategy.

 If the development is being retained a long-term commercial mortgage can be put in place before the start of the build to repay the development finance upon completion of the build.

 If the development is to be sold then a realistic time for selling should be allowed within the loan term of the finance contract

 Alternatively, development exit finance can be utilised. It can relieve the pressure of having to make quick sales and is designed to repay the original property development finance and raise capital for other purposes once the project is finished or close to being finished, and before the property is sold or refinanced. This can improve the liquidity of the developer, and enable them to seize new opportunities.

The Role of Legal Expertise

The need for engaging with a Legal professional who specialises in property development can’t be underestimated and will play a crucial role in ensuring finance and building contracts are thoroughly reviewed and the developer’s interests are protected.

The Future of Property Development

As the industry grows, the demand for flexible and innovative financing solutions increases. These solutions must adapt to the complexity and scale of modern development projects.

In conclusion, property development finance is a dynamic element of the real estate world. It enables developers to pursue ambitious projects, driving economic growth and shaping our cities. A deep understanding of this financial domain is vital for any developer looking to succeed in the competitive field of property development.

Before you Begin the Application Process:

Consult with an Expert Property Development Finance Broker: At Evolve Finance we understand how property development finance works and can guide you through the intricacies of the process, helping you explore all available options.

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