Ground Up Development Finance

What Is Ground Up Development Finance?

Ground up development financing is a specialist form of finance that is designed to fund the construction of new buildings from scratch – hence the term “ground up”. This financial product is a lifeline for property developers, enabling them to cover the costs associated with constructing new commercial or residential properties.

Unlike a traditional mortgage or bridging loan, development finance for ground up developments is specifically tailored to the unique needs and challenges of property development. It takes into account the complex nature of building projects, from obtaining planning consent to managing cashflow during the construction phase.

In essence, ground up development finance is the financial fuel that powers the engine of property development. It’s the catalyst that transforms a plot of land into a complete development, whether that’s a block of apartments, a commercial property, or a set of sustainable developments.

How Does Development Finance Work for Ground Up Projects?

Now that we’ve covered the ‘what’, let’s move on to the ‘how’. How does ground up property development finance work in practice? Well, it’s a structured process that involves several key steps and requirements.

First and foremost, a property developer approaches a finance lender that offers ground up development finance products. These lenders could range from traditional banks to pension funds and investment funds specialising in the property and finance industries.

The developer then submits a detailed proposal for their planned development. This proposal should include information about the project’s scope, planning consent, estimated costs, projected cashflow, and potential return on investment. The developer’s experience and past performance in property development are also taken into consideration.

Once the proposal is approved, the lender sets the terms of the loan, including the interest rate, repayment schedule, and any additional conditions. The loan is then released in stages, at agreed points, which are aligned with the progress of the development project. This staged release of funds helps manage the risk for the lender and ensures the developer maintains a healthy cashflow throughout the construction process.

It’s important to note that ground-up property development finance is a form of senior debt, meaning it takes precedence over other forms of debt in case of a default. This makes it a relatively secure form of lending for the finance lender.

How Much Can I Borrow using this type of Finance?

The amount you can borrow through this type of development finance depends on several factors. These include the scale of your project, the estimated costs, the projected value of the completed development, and your track record as a developer.

Typically, lenders offer finance funds that cover a certain percentage of the project’s total costs. This percentage, known as the loan-to-cost (LTC) ratio, can range from 60% to 90% depending on the lender and the specifics of the project.

To calculate potential loan amounts, you’ll need to have a clear understanding of your project’s costs. This includes everything from land acquisition and construction costs to professional fees and contingency funds.

Remember, while ground-up property development loans can provide substantial capital, it’s not designed to cover 100% of your costs. You’ll need to have some equity or other forms of finance to fill the gap.

In the world of property development, ground up property development finance is a powerful tool that can turn your vision into reality. By understanding how it works and how to leverage it effectively, you can use this type of loan to set the stage for successful and profitable developments.

What Are The Costs of this type of Ground Up Debt Finance?

When it comes to ground-up property development loans, it’s crucial to understand the costs involved. After all, as a savvy property developer, you’ll want to ensure your project’s financial feasibility. So, let’s break down the costs associated with this type of finance.

Firstly, there’s the interest rate. This is the cost of borrowing and is usually expressed as a percentage of the loan amount. The rate can vary depending on the lender, the risk profile of the project, and the current financial market conditions.

Next up are the arrangement fees. These are charges levied by the finance lender for setting up the loan. They typically range from 1% to 2% of the loan amount.

Then, there’s the exit fee. This is a charge you’ll need to pay when you repay the loan in full. Some lenders calculate this fee based on the original loan amount, while others base it on the gross development value (GDV) of the completed project.

Lastly, there may be additional charges such as valuation fees, legal fees, and broker fees. These costs can add up, so it’s essential to factor them into your project’s budget.

How Long Does It Take To Arrange a Property Development Loan?

Arranging ground up development finance isn’t an overnight process. It involves several steps, each of which can take time. From the initial application to the final disbursement of funds, you could be looking at a timeline of several weeks to a few months.

The exact timeline can depend on various factors, including the complexity of your project, the lender’s processes, and how quickly you can provide the necessary information and documentation. However, working with an experienced broker can help streamline the process and potentially speed up the timeline.