Property Finance Options - 1. Development lending
So it seems the rest of the UK are still very unsure of what type of finances are available across a number of sectors. So over the next week I am going to write an overview of the types of lending available to people and business alike and how this type of borrowing could be used.
I wanted to start with development finance as this seems to be the type of lending most people have the least knowledge about. Development lending is completely different to mortgage lending, but a lot of people struggle to understand the difference. Development finance is used for construction projects to create new homes, either single unit or multiple unit. It can also be used to fund build of commercial units and mixed use units (Commercial building on ground floor such as a supermarket with flats above this unit).
First of all it is normally a lot more expensive than mortgage borrowing, and there are a huge number of factors why. The risk is so much more with development funding, although the lender will take a first charge over the property or plot of land the security is not worth anything until the development is finished. This means a lender could potentially have millions of pounds leant to a developer with a security valued at next to nothing. Secondly the risk through the process of the development, so much can go wrong which will stop the build going ahead which then leaves the lender with no security if a project has to be stopped half way through. How will the lending be paid off at the end of the project? Will it be sale of property? re-finance of debt? What happens if this cant be achieved due to a change in circumstances. All this and many many more reasons is why the costing is higher than normal mortgage borrowing.
A lot of high street banks (the ones that actually lend to the development market) will have a very strict criteria when doing development lending. They will normally require a minimum of 5 previous developments and will usually lend 70% of purchase price of development plot then a further 70% of development cost. The list of criteria goes on and on, which makes it very hard for the smaller companies or individuals to gain finance for these developments. As long as the professional team you put in place are experienced, there are lenders available that will lend up to a total of 70% of the gross development value. (Please note each case in assessed individually based on a huge number of factors). Not only this but the criteria not half as long as the main high street banks which makes the lending a lot easier to obtain.
One of the development deals we helped one of our clients complete with this week was essentially a 100% lending deal. The client owned an office with £100k outstanding on the commercial mortgage with the existing lender. He wanted to borrow £500,000 in total to add 2 residential flats to the unit. The planning was permitted and now the funds were required to move forward. So we managed to secure a £500,000 borrowing against a £500,000 valuation (100% lending). £100,000 was used to pay the initial mortgage off as the bank would not allow this to stay due to their security being ripped apart whilst the work was being done. The final development value of the plot is £1,400,000 once the work is complete and the exit will be a re-finance to normal commercial or buy to let mortgages (still undecided how we will structure exit). The funds will be released in tranches and a surveyor will make ongoing valuations to make sure the lenders money is safe. This particular client also had no previous development experience, but the professional team he is using is extremely experienced in this field which satisfies the lenders requirements.
If you have any questions or would like more information on development finance then please feel free to contact me at James@mesafc.co.uk
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