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How To Raise Finance For A Property Development-Part 2

How To Raise Finance For A Property Development-Part 2

You may be under the impression that you can no longer get property development finance . This is not true. However, what is true, is that financing a property development via regular high street banks is  very difficult, because they simply don’t want to lend due of their own issues.

However, there are commercial lenders who still like lending on property developments. The criteria is strict, but, the loan to values are much the same as they have always been. Commercial property development finance is always more expensive, as lenders seek a genuine financial commitment from you that matches their own. You can also bank on adding at least 5-6% on the loan value in costs. Finance for a property development will usually require these  fees:

  1. Set up fee fee- usually 2%
  2. Exit fee- around 2-3% which is linked to GDV ( gross development cost)with most lenders;
  3. Some lenders charge a percentage of the facility.
  4. Introducer fees 1-2%
  5. surveys & legal fees (variable)

As you can see, it’s an expensive game, so you need to be absolutely sure that the development is costed properly. The lenders we recommend will seek a provable track record of previous property developments and will not look at new developers unless they are part of a joint venture with an experienced one.( We can advise you on this in more detail.)

What’s The Criteria For Property Development Finance?

Lenders for property development finance will need you to own the plot already and for it to have been paid for with your own cash ( not a mortgage), or they will assume you have the cash to buy it, or already own it outright. Basically lenders want to see financial commitment from your side before they consider lending. They want you to take part of the risk. If they really, really like the deal, the lender may be prepared to put up somewhere approaching 50% of the plot, with the remainder funded using your cash.

There’s no getting away from it, these lenders are picky about who they loan money to. They are most comfortable with lending around 50-60% of the gross development costs. The property development finance will be released in around 4 to 5 stage payments, with inspections on site before each new tranche of finance is released. Interest is charged only as each stage payment is drawn down.This type of lender also has a preference for new build developments, but would also look at larger convertions etc.

Geography Matters

Lenders are very geographically biased, so unless you are property developing in Central London, the location of your plot means that some lenders will just give a straight no.  We know which lenders favour which areas, so, for example if you were building in the Midlands, we would know not to approach one of the lenders who only lends south of the Thames.

Detailed cost analysis of the project will be expected, along with a business plan for the development. Each project is examined on it’s own merits, there are no broad brush strokes to this kind of lending as with regular bank or BTL lending. Lastly, one good thing is that interest charges with some lenders can be rolled up until you start drawing down on the finance,  experienced developers will be aware of the facility of rolled up interest, which helps the cash flow of a project.

In short, this is for experienced property developers with a proven track record. Each lender will have slightly different criteria for financing a property development. If you are seeking property development finance, it is available for the right clients.
contact us for more info Or visit our finance page for more in depth details.

About The Author

Roberta WardOur ethos is to help people to really understand property investing without all the guff and marketing hype and bias. We are proud to be wholly independent and ethical. No nonsense advice about tax, pensions, property investment and finance via our blogs and social media channels.

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  • Loco

    Hello
    Its very interesting about all those commercial lenders but this a case for some one who has got already a residential mortgage.For someone without mortgage and planning his first property development,standard varible rate mortgage from most of the banks should be alright.

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