Commercial Development Finance
A detailed breakdown of property development loans for commercial property
Author: Gary Hemming CeMAP CeFA CeRGI CSP
20+ years experience in property development finance
Commercial development finance explained
What is commercial development finance?
Commercial property development finance is designed to allow developers or business owners to build new commercial properties.
These properties can be let, sold or used as a base for the developers own business.
How does commercial property development finance work?
These loans are issued based on a stage release basis. That means that the initial release of funds is usually only a percentage of the total facility – often a set percentage of the current value.
Once the site is acquired and the initial loan has been made, the remainder is paid out in set stages, as the build progresses. Drawdowns can be made over any schedule, either based on the passage of time (e.g. monthly drawdowns), or when set milestones in the build are reached.
Types of commercial development finance
Building to sell
When building to sell, the application will hinge on the saleability of the units being built. Commercial property is generally less liquid than residential, so the surveyor’s comments around the gross development value, and the likely marketing period required for a sale will be key.
Building to hold
When looking to hold your development as an investment, your lender will focus on two main factors – the rentability of the properties being built, and your ability to secure finance for it when let.
Pre-lets are an important factor for lenders. Where all, or even some of the units are pre-let, your application will have a much greater chance of success.
Building for your own business
When undertaking a commercial property development for your own business, the lender won’t be as concerned about the likelihood of achieving a sale or the rentability of the property. Instead, they will focus on your ability to secure a commercial mortgage once the property is built.
How much can I borrow?
How can I work out my maximum loan?
The maximum loan on property development finance is worked out using several figures.
- Firstly, the initial funding will be worked out on the loan to value (LTV) of the site. Some lenders will ignore this figure, should the following figures be acceptable.
- The lender will then consider the total borrowing in relation to the end value of the build, this is known as the loan to gross development value (LTGDV).
- Finally, the lender will agree to fund a certain amount of the build costs, this is known as loan to cost (LTC).
When looking at commercial development finance, we can usually fund 55/65% of the initial acquisition costs and up to 60/65% LTGDV. Some lenders will restrict loan to cost. However, there are lenders who are willing to offer up to 100% LTC.
Does my income affect how much I can borrow?
The lender won’t usually base their loan on your own personal income.
When building for your own business, the lender will base your maximum loan on how much you would be able to borrow on a commercial mortgage, as this is how they will be repaid.
Costs of development finance for commercial property
What rate will I pay?
Rates start at 3.5% per annum for properties which will be occupied by the developer’s business post completion.
For traditional developments which are being built to sell or let, rates of 7-11.4% per annum are realistic. The rate you pay will depend on the property type, location, exit strategy and your experience/profile.
Are there other costs?
Yes, in addition to the interest charged, you will also pay a number of other fees. The main ones are:
Arrangement fee: The arrangement fee, often known as the facility fee, is charged by the lender for setting up the loan. It is usually between 1-2% of the total facility.
Exit fee: While not charged by all lenders, but most do. This fee is payable to the lender when the loan is repaid. It is usually 1-2% of either the loan amount or GDV, depending on the lender chosen.
Broker fees: Brokers often charge fees for arranging development finance. Some lenders will pay the broker a fee for successfully placing the application with them (usually 1%), while others will pay nothing.
Valuation fees: As mentioned above, the lender will instruct a chartered surveyor to produce a report on the scheme. The cost of this report tends to increase in line with the GDV of the scheme.
Professional fees: Other professionals will be needed and will charge for their services. You will pay out for architects, quantity surveyors and solicitors. Depending on the scheme, you may also need to pay for project managers and monitoring surveyors.
We usually expect to earn 1% from a successful development finance application, which will mean we wouldn’t generally charge a broker fee as long as the lender pays us.
Where to get commercial property development loans
Lenders
These loans are offered through a variety of lenders, and can be broken down into 3 main types.
The first is high street banks. They tend to take a very cautious approach to lending, but offer very low rates, which can make them appealing. When working with a high street bank, you will usually find that the deposit that you need to put down increases when compared with other lenders.
Challenger banks also offer commercial property development finance, and will take a more relaxed view to applications. You’ll need less deposit and may find the application process slightly simpler, although you will pay a slightly higher rate than those offered on the high street.
Specialist development lenders tend to offer a more specialist service and may lend more than the above lenders, meaning you need a smaller deposit. The rates offered by these lenders can vary wildly, so while some offer very low rates, others can be very expensive.
How to apply for your commercial development loan through ABC Finance Ltd.
Follow these steps to ensure a successful application:
- The first step before starting your application is calculating your costs, end value, profit margin and how long the project will take.
- Enquire online or call us on 01922 620008. We will talk through your potential application, taking down any relevant details.
- We will provide you with a full written agreement in principle. It will detail the interest rate, fees and headline borrowing terms, along with what documents are required to submit a full application.
- Once you have completed and returned the required documents, we will submit your application to the lender along with a comprehensive report on the project.
- Once the lender has assessed the application, they will arrange to meet you on site. This gives them a chance to meet with you and to understand the project more fully.
- After the site visit has been completed, your lending manager will usually take your application to the lenders credit committee. These are the underwriters who sign off the application as acceptable to the lender. Once approved, the lender will issue the formal offer, subject to valuation and legal work.
- A surveyor completes a report covering the current value, anticipated build costs, anticipated gross development value and expected demand.
- Your solicitor is instructed to carry out the legal work and satisfy all conditions. Once satisfied, you will sign the formal offer and return it to the lender. It is important that your solicitor is experienced in dealing with development finance as inexperience here can slow the process down significantly.
- The process is now ready to complete and the funds can be released. You are now able to start drawing on your loan and begin the development works.
Commercial development finance criteria
What is your minimum and maximum loan size?
We offer commercial development finance from £50,000 with no maximum loan size.
What term can you lend over?
We can offer this type of finance for a maximum of 36 months.
Who can apply?
We can offer commercial property development finance to individuals, partnerships, LLPs, Ltd companies and pension funds.
We will also consider applications from expats, overseas borrowers and companies with complex ownership structures.
What we lend against
Commercial development loans can be secured for the following:-
- Construction of industrial buildings
- Land with planning for commercial property
- Construction of office blocks
- Mixed residential and commercial schemes
- Refurbishment or conversion of shops
- Office to residential conversions
- Refurbishment Finance
- Pub to residential conversion
- Builds on farmland
The above list is not exhaustive, if your enquiry relates to a different scenario, get in touch and we will let you know exactly what we can offer.
Locations
We offer loans across the UK including England, Scotland, Wales and Northern Ireland.
Do you offer loans to first-time developers?
We are able to offer finance to both experienced and first-time developers. If you’re looking to develop for the first time, we would highly recommend working with experienced professionals.
Whatever your situation, we will use our contacts across the market to secure the lowest commercial property development finance rates for you.
FAQs
Can I roll up my monthly repayments?
When taking out commercial property development finance, you can roll your monthly interest payments into the loan. This means there are no monthly repayments to make during the term, subject to fitting the LTGDV criteria for the lender.
Each lender has their own way of handling the interest. Some will add the interest above the maximum LTGDV, whereas others deduct it.
Can you offer loans to applicants with bad credit?
Yes, a poor credit history doesn’t prevent you from taking out development finance for commercial properties, although it may restrict your choice of lenders.
We can consider applications with any previous adverse credit including defaults, CCJs, previous IVA or bankruptcies and mortgage arrears.
Read more: Regulated development finance or 100% development finance.