The Complete Guide to Development Finance

How does development finance work? 

Property development finance is a short-term funding solution that typically lasts between 12 and 36 months. The main function of private development finance is to help with buying and developing a project such as a new build house, a property conversion, an extension, or multiple dwellings such as a block of flats. It can also be used across multiple phases of a project to manage cash flow and balance repayments. For example, the initial funds can be used to purchase the land, and then more instalments of funds can be released to finance different stages of the build. 

Unlike a traditional mortgage, where the lender takes the value of the property as well as the borrower’s income and finances into account, private development finance is based on the projected value of the property when complete. For some, it can be the best way to finance a property development project. 

Information required 

In order to successfully apply for a residential property development loan, the borrower will need to provide the following: 

• The cost of purchasing the land. This can be funded by the developer or partly by the lender usually up to 50% of cost. 

• The projected costs of construction, including legal and professional fees. Ideally an estimate from a contractor is provided for the infrastructure costs, the build cost and the provision of utilities. 

• A detailed project plan with timescales as to time of construction and selling period. 

• The projected value of the properties usually certified by the estate agent being used to sell the properties 

• A cash flow showing how the loan is to be drawn down and used and when repayments are made 

The lender will then provide a list of terms, based on this information, that needs to be agreed to before proceeding to a full application. Generally, the loan is repaid through the sale of the properties, and this makes it a great option for developers. 

Development Finance: Pros & Cons 

 Pros 

• Access to large amounts of funding. 

• Speed of application & receipt of funds. 

• Loan secured against the property value rather than personal assets or income although a personal guarantee is usually required by the lender. 

• The loan is paid back as sale of properties take place 

Cons 

• Development finance can be complex, and care is needed to organise 

• The arrangement fees can be high 

• Interest rates are set out in the agreement, but lenders have different ways of calculating the actual charge 

• Delays or unexpected declines in property values could leave you liable for large repayments through the personal guarantee. 

How does the application process work for Development Finance? 

The process itself for applying for development finance is relatively straightforward, although due to the short-term nature of the loans, the application can sometimes be complex.  

• The first document is the application form which sets out the basics such as a project outline and timelines, predicted costs, completed value, and the loan amount required. 

• The lender then makes an ‘Offer in Principle’. This sets out the T&Cs of the loan and there are no credit checks involved at this stage. 

• If this is agreed, the lender instructs his surveyor to commence a desktop study and then undertake a site visit to determine the project’s viability. 

• Once the surveyor’s report has been reviewed and all is agreed, the lenders legal team go through searches to assess whether the title is clean and marketable, to confirm that the 1st charge is secure. 

• The lender then produces a ‘Facility Document’ which outlines all the terms and conditions for the borrower to sign. 

• Once signed, the lenders solicitor transfers the first draw down to your legal team who will release it to you. As the loan is now live, any subsequent drawdowns will be sent directly to you.