How to Get Development Finance for a New Build?
Development finance lenders are your partners in progress, aiming to maximize returns in the shortest time with minimal risk. As a developer, you’ve identified a promising opportunity for profit, but investing your life savings isn’t the prudent choice. However, despite the potential, many first-time developers struggle to secure construction loans. The culprit? The dreaded word – “risk.”
For lenders, financing a project by a first-time developer is like hiring an employee without a CV or references; it’s a leap of faith. So, if you’re convinced your project will succeed, here’s a guide for first-time developers:
Finance companies prefer developers with some experience. They want assurance that you grasp the intricacies of development costs and can maintain meticulous cost control throughout the project. Many lenders won’t entertain direct applications; they seek proposals “packaged” by experienced brokers.
The Art of Packaging
Loan “packaging” is akin to a comprehensive business plan. It includes details like land/building purchase, build costs, financial, marketing, insurance, architect fees, legal considerations, and an exit plan. First-time developers face a more rigorous due diligence process, but a skilled team of brokers can assist in refining the proposal.
Construction Finance Basics
Construction loans for novices can fund various projects – new homes, commercial spaces, conversions, build-to-let properties, and renovations. Your project will have three deadlines: land/property purchase, conversion to the desired use, and property sale or loan settlement. The construction term spans these deadlines.
Bridging loans are a popular choice. They offer short-term funding (up to 65% of property value) with quick access. Joint ventures with experienced developers are another avenue, providing project finance and expertise. Some lenders may require a profit share.
Negotiating Your Loan
Experienced brokers can secure favourable terms. Negotiate on interest rates, opt for staged drawdowns, extend the facility duration, and aim for the highest loan-to-value (LTV) possible. The goal is to optimize profitability and flexibility.
Planning Your Building Work
Different projects demand distinct finance options. Light redevelopment may use short-term funding, heavy renovation might require longer-term financing, and ground-up development involves complex, extended financing. Commercial mortgages are suitable for non-residential properties.
Detailed Guide to Get Development Finance for a New Build
Development finance is the key to turning your vision into reality. In this comprehensive guide, we’ll walk you through the essential steps to secure development finance for your new build.
Step 1: Understanding Development Finance
Development finance is a specialized form of funding tailored for construction projects. Lenders provide capital to cover land acquisition, construction costs, and other associated expenses. The goal is to maximize returns over a specific timeframe while managing risks.
Step 2: Assess Your Experience
Most lenders prefer developers with some experience. If you’re a first timer, it’s crucial to demonstrate a clear understanding of the costs involved in your project. Highlight any relevant skills or knowledge that contribute to your capability as a developer.
Step 3: Work with Experienced Brokers
Many lenders won’t entertain direct applications. Experienced brokers, such as Clifton Private Finance, can play a crucial role in packaging your proposal. They work with you to create a comprehensive business plan, ensuring that your project is presented in the best possible light to potential lenders.
Step 4: Crafting a Detailed Proposal
Remember, meticulous planning and transparency are key. Lenders want to see that you understand the complexities of the project and have a realistic view of potential challenges. Your proposal should function as a fully-fledged business plan, covering:
- Land and/or building purchase.
- Build costs.
- Financial, marketing, insurance, QS/architects, and professional fees
- Disclosure of potential legal issues
- Exit plan (sale or lease)
Step 5: Construction Finance Basics
Understand the fundamental aspects of construction finance:
- Deadlines: Land purchase, conversion, and property sale or loan settlement.
- Term: The duration from the first to the final deadline.
- Types of Projects: New homes, commercial spaces, conversions, build-to-let properties, and renovations.
Step 6: Choose the Right Loan Option
Explore loan options that suit your project:
- Bridging Loans: Short-term loans covering up to 65% of property value.
- Joint Ventures: Collaborate with experienced developers, sharing resources and expertise.
Step 7: Negotiate Favourable Terms
Work with your broker to secure advantageous terms:
- Interest Rate: Aim for the lowest possible rate based on a solid business case.
- Staged Drawdown: opt for drawing down funds as needed to save on interest.
- Length of Facility: Negotiate an extended repayment period with minimal penalties.
Step 8: Planning Your Building Work
Understand the finance options based on your project’s scope:
- Light Redevelopment: Short-term funding for minor changes.
- Heavy Renovation: Longer-term funding for major structural changes.
- Ground-Up Development: Complex, extended financing for comprehensive projects.
Step 9: Different Types of Property Development Finance
Explore various finance options tailored to your project, such as commercial mortgages for non-residential properties.
Securing development finance for your new build project involves careful planning, collaboration with experts, and a clear understanding of your project’s intricacies. By following these steps and seeking guidance from experienced professionals, you can navigate the complexities of development finance and turn your construction dreams into a successful reality.