Construction industry veterans know that finance is a bull that all firms must wrestle with on a regular basis. Unlike other start-ups (in the digital realm for instance) construction start-ups face large overheads and low margins meaning that it can take years and years until they are able to turn a healthy profit. The key to survival lies in knowing what financial products are on the market and how to use them strategically. With this in mind, let’s dive deep into development finance with help from finance experts at Lending Expert.
What is development finance?
Development finance is a short term loan product that is targeted at residential property development. It is usually based on the project’s gross development value; that is to say the market value of the fully constructed or refurbished property. Like most loans it is paid back in stages, but unlike most loans it is paid out in instalments too.
Imagine that you have a property which you want to develop into 4 apartments. Each of these apartments will have a market value of £250,000 so your gross development value will be £1 million. Of this, a developer can apply for a development loan of up to 60% of GDV and up to 75% of total costs including purchase price and build costs.
How does it work?
Development finances is divided into several instalments;
The facility- This is the start-up capital usually used to purchase the property or plot for development or property and begin work however the developer is still expected to make their own contribution to the purchase price. A facility is usually no more than 50% of the purchase price.
Conversion or refurbishment costs- Once work has begun the lender will usually dispatch a Quantity Surveyor who will check on the development in progress then send a written report back to the lender. Funds will then usually be advanced within 24-28 hours. Generally, refurbishment costs will be split into 4 instalments.
What’s the difference between development finance and a bridging loan?
Because both are short term loans to help bolster or supplement a construction firms own contributions without crippling their cash flow it’s easy to confuse development finance with a bridging loan. However, bridging loans differ from development finance in a number of ways.
A bridging loan will typically also be up to 60% of a project’s Gross Development Value. However, unlike development finance a bridging loan will be a one-off advance. Bridging loans are often used on non-mortgageable properties (i.e. those that do not have facilities a property needs in order to be eligible to be mortgaged such as a sink or a bathroom). Some developers also use bridging finance to give them the liquidity that they need for a competitive edge that allows them to outbid rival firms who would need to mortgage a property.
Once again, success depends upon learning all that there is to know about a financial product and making an informed decision as to which is best to leverage for the unique needs of a given project.