When going beyond heavy refurbishment and moving beyond structural changes and into conversion, you move into the property development finance market. Development finance will always work on a case by case basis due to the constantly evolving market, changing criteria, desire to lend in certain areas and on certain property types. With that comes a need for market knowledge and lender contacts as these can be critical to a successful project.
What Can I Borrow?
As master finance brokers we understand that each application has to be judged on its own merits, with lenders having very different criteria and interpretations of each application. However as a general guide lenders will release funds to you in ‘tranches’, staged payments which are released upon successfully reaching a set target in the build. Once this target it met, work is inspected and the next stage funded. It is not uncommon to see a release of 60-65% of the purchase price of the site and up to 100% of the build costs (planning costs and other fees and charges generally paid by the client), subject to sitting no higher than 55-65% of the gross development value (GDV), the open market value of the project once completed and ready for sale or let.
Is the Application Based on me or the project?
The simple answer to this is that both are important in almost equal measure, lenders will tend to assess the application on a number of factors, firstly looking at you as an individual, your experience, your past payment record, net worth, ability to support yourself during the build, potentially your local knowledge, ability to manage a project of this size along with management of the finances and the team (or lack of), that you choose to surround yourself with.
As for the project, major factors in the decision making and risk (therefore pricing) will be the location and the type of property you intend on building. The project may be excellent, but if there is no demand for what you plan on selling or letting logic dictates that sale and letting values could vary wildly, ultimately reducing the profit margin.
Many lenders tend to be keen on directing more funds toward the south of the country and therefore a scheme further north tends to require knowledge of what lenders current exposure to certain areas are and where they who may be happy to take on schemes in the area you are looking at.
Lenders are of course always looking for the most security possible and will tend to offer slightly more money if there is an element of pre-sale or pre-let, meaning there is an increased likelihood of repayment once the project is complete and of course a far better indication of market demand and value on completion.
Profit margin also plays a crucial role in a lenders desire to lend on a scheme and will no doubt dictate your interest in a particular project, it goes without saying but a larger profit to cost equals a far better buffer for any unexpected costs and therefore a reduced risk of the scheme running a loss.
Maximising profit margin is ultimately the main aim when carrying out a development. Controlling the cash flow of a scheme is often overlooked and this can be the most important factor as waiting on a stage payment can ultimately hold up your ability to order materials, delay payment of those working on the site or even cause completion of your project to overrun costing you time any money.
A headline interest rate will always be tempting, however if this is not the most suitable lender for you, it can cost much more over the term of the development. Unlike most other types of borrowing, you will work closely with your lender throughout the project and as such, you need to be able to work well with the individuals and make sure the money will come quickly when needed.
Even if you have a lender in mind, it is always worth testing the market as you may be able to save a huge amount on your overall finance costs, release more money from the scheme easing your cash flow in the process, find a better fit and often more importantly offer a more suitable stage release scheme, which will work better for your needs.