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How does development finance work?

6 November, 2018

What is a development loan?

A development loan is a short-term funding option, usually for between 6-18 months. It is designed specifically to assist with the purchase costs and build costs associated with a residential development project. This can be a new build, conversion or refurbishment covering a single unit through to multiple units built across a number of phases.

A development funding package invariably involves two key parts to the loan. The first element of the funding will often be used to assist with the purchase of the development site. This could be land where a number of new properties will be built or an existing property that will undergo a refurbishment. The second stage of the loan is used to pay for the costs of the build works associated with the project.

This secondary part of the funding is usually drawn in stages, as opposed to being accessed in one amount at the outset. This often happens once a month as works are completed on the project.

Depending on the type of project, the experience of the developer and the level of build costs, drawdown of the build element of the development finance will be subject to independent monitoring surveyor (IMS) sign off. The IMS will act as the ‘eyes and ears’ on the project for the Lender to make sure works are progressing on time and on budget and will flag any potential issues. They will be acting for the Lender, but their costs will be payable by the borrower.

Build works can be undertaken on a self-procurement basis or via a main contractor under a fixed price contract.

The amount of funding that can be provided will be determined by a professional valuation report that will provide 3 key numbers:

  1. current value – i.e. the value of the site with planning or the value of the property before refurbishment;
  2. the build costs; and
  3. the gross development value – i.e. the value of the completed property(s) assuming all works have completed.

Each lender will have their own lending parameters that dictates the maximum that can be lent.

MSP Capital will lend up to 70% of the current value and 100% of the build costs. Each deal is assessed individually but the funding must be structured in a way to make sure there is enough funding in place to complete the build in its entirety.

The lender will charge fees and interest for the Loan with the amount of the charges depending on:

  1. the amount borrowed;
  2. the percentage borrowed against the overall costs – i.e. the current value and build costs combined; and
  3. the term the loan is required for.

The terms are then detailed in an Offer of Finance, which once accepted will allow the Lender to formally begin the lending process.

The mortgage and loan paperwork will then be dealt with by the Lender’s and the borrower’s solicitors.

Once all formalities are completed, the initial funds towards the purchase of the site can be released to the borrower with the remainder released in stages against works completed and usually signed off by the IMS.

Repayment will be expected before the agreed term has expired from the sale of the completed property/properties, although an extension will sometimes be permitted to provide an additional window in which to secure the sales, subject to additional fees.

Property development loans explained

A secured loan to help with the purchase of a property or land and to provide the build costs for the project.

Various types of developments from simple refurbishments and renovations to large new-build house projects are eligible for development finance.

Often the site will have to have planning consent (by law) although sometimes a version called ‘Permitted Development’ is required. These are obtained from the local council who will often advise applicants about their options and the council’s requirements.

Lenders will normally cap their lending against the value of the finished project (known as the Gross Development Value) and will provide only a certain percentage of the purchase price.

The most conservative lenders in this sector are the high street banks. Alternative and specialist lenders will often provide more debt to their clients.

Generally, loans are agreed for between 6-18 months depending on how long the project will take to complete and how long the finished properties will take to sell.

Once a project is up and running the build loan is drawn down in stages (usually monthly) with the amount of each drawdown equating to the value of works completed in that month.

Loans are secured, usually against the site/property in question, and normally through a first legal charge/mortgage.

The vast majority of development loans are provided for residential properties although occasionally, and in certain circumstances, a loan can be for ‘mixed use’ or wholly commercial use purposes.

Property development finance options

MSP provides fast, flexible development finance tailored to suit the borrower’s requirements and the type of development being undertaken.

Funding can be provided to assist with the simple conversion/refurbishment of existing residential dwellings, to the more complex multi-phased schemes where multiple units are constructed over a longer period of time.

Most development loans will be for a period of up to 18 months, but this will be very much dependent on the nature of the scheme being funded. A straight forward refurbishment loan may only be required for 6 months, whereas a multi-unit new build may require 18 months. The term of the loan will allow time for the property to be purchased, developed and then sold or refinanced to repay the debt.

MSP will fund all types of residential development including houses, flats and conversions of listed buildings and permitted development of offices into residential.

In some instances, development of commercial properties can be considered.

MSP will look to provide up to 70% of the land value (confirmed by RICs valuation). If this is higher than the purchase price (e.g. where value has been added via a planning gain) MSP will recognise this and fund accordingly. Many mainstream lenders will not take this into consideration.

MSP will then fund 100% of the development costs. These can include the core construction costs, professional fees and other expenses such as S106/CIL (Community Infrastructure Levy) payments.

All funding including interest and fees will need to be within 70% of the gross development value.

Each loan will be bespoke to fit the borrower’s individual requirements and in most instances the build loan element of the facility will be drawn upon certification from a monitoring surveyor. By drawing in tranches following completed works, loan interest is only payable on the amount drawn at any one time.

MSP will often allow ‘equity releases’ when sales of completed units occur that can assist with cashflow where a number of other lenders will require 100% of net sale proceeds.

Allowing a cash release often enables clients to move on to future projects in a timelier manner and does not result in equity being tied up in an unsold property.

For further information about development finance, please contact the team at MSP Capital on 01202 743400.

Development Funding in Weymouth

21 March, 2018

For Redtale Holdings, securing residential planning consent for 46 houses at Lorton Park in Weymouth was the successful culmination of a long planning journey.

As experienced developers and with a long-standing contractor on board, the Redtale team thought the hard work had been done. But they discovered that securing a suitable funding package to deliver the scheme was the next challenge.

It quickly became clear that the rigid funding parameters of a high street bank simply didn’t work for Redtale on a phased scheme. The structure wasn’t flexible enough or likely to deliver the level of funding needed. (more…)

Funding in the Fast Lane: Deal Completed in 14 days

20 February, 2018

MSP recently agreed a development funding package on a £4m house in one of the premier roads in Poole. The deal had stalled with the client’s high street funder, but having reached out to my former customer, we were able to agree a structure to refinance their current lender and get this part-built project back underway.

This was all achieved in 14 days from start to finish – we really can do deals that quickly, and we’re delighted to be assisting this prestigious project.

After 28 years in my previous role with a high street bank, I know first hand how much tougher it has become to secure residential development funding. Conditions and pre-draw down requirements have mushroomed, which has seen the lending process become massively extended. Discussions are required to start weeks ahead of a potential site purchase to ensure the lender is ready in time. However, it doesn’t have to be like that. (more…)

Case Study – South London Development

31 May, 2017

MSP Capital came on board to support the completion of a partially-built prime mixed-use development site with consent for 19 luxury apartments and a ground floor commercial unit.

We were able to structure a deal that incorporated lifting the previous debt on day one and providing further funds to finish the development with certification from our monitoring surveyor.

The clients were very satisfied with the service provided by the team and continue to use our bespoke lending products. We are pleased to strengthen this relationship with our continued support.

Paul and his team are very reliable, proactive and accommodating. They have supported us extremely well throughout the project. – Keiran

Case Study – New Developer on the Scene

16 May, 2017

A new developer on the scene started their first residential development with MSP Capital.

We assisted in the loan structure at the beginning of the project and, nearing completion, helped them fund a part exchange. This helped them realise the capital to fund another project with us.

They are now in the middle of their second residential development project – the demolition of an old disused church building and construction of 7 new 3 bedroom homes.

We will happily continue to use MSP Capital in future projects. The team are extremely knowledgeable about all aspects of development, they understand the complexity of each case and appreciate not everything is black and white. I enjoy the benefit of discussing the project with them over the table and dealing with the faces that make the decisions. I find them extremely supportive, refreshingly flexible and I look forward to our continued future business. – Steve

Case Study – Amesbury Development

12 May, 2017

The development, a former garage workshop, had received full planning consent for the demolition of its existing buildings and the construction of 13 residential dwellings and 2 retail units.

Rather than go to a high street bank, our borrower chose MSP for its flexibility and by using our higher loan to value ratios was able to fund other business opportunities elsewhere.

We were able to provide the borrower with swift decisions and views taken during the build process, which helped them to capitalise off-plan sales.

MSP are brilliant and offer us a fabulous service. – RJ Morrall Ltd

Case Study – Keynes Court

5 April, 2017

This fledgling residential developer struggled to get funding from high street banks in order to finance a two-storey development of five residential apartments.

Impressed by their professional team, MSP Capital supported the progression of the development from its inception through to completion.

I was very satisfied with the service and support throughout the whole project. This was my first attempt at property development and Director Paul Miracca was there when I needed him. – Wendy Keynes, TK Developments

Build Finance for Residential City Centre Redevelopment and Land Swap

30 October, 2016

The client approached MSP Capital with a requirement for build finance to construct eleven flats.

The client had a loan secured on a first charge against a development site, but as part of the agreement with the previous owner, our client was obligated to provide a new ‘Community Centre’.

The site had additional problems relating to access and party wall issues including basement parking, which increased the complexity and overall build costs.

After struggling to raise finance with other high street lenders, MSP Capital was able to assess the value of the land and offset the costs of providing the community centre to conclude that the project was a commercially viable development offering suitable security.

MSP Capital is now providing the build finance for the scheme, with our borrower having already secured five sales.