Ground Up Development Finance
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For property investors and property developers, ground up development is a strong option for those looking to produce capital gains from property projects.
Whether you’re an experienced developer, or even considering your first property development project, this guide will offer crucial insight into the ground up development finance market.
What is ground up development?
Ground up development is a form of property investment that sees property developers build new property from scratch.
It is a common form of property development that can see the developer build anything from apartments, a house, commercial property or everything through to a new housing estate.What is ground up development finance?
Ground up development finance is a form of property development finance that is used specifically fund ground up builds.
Development finance is funded through specialist property finance lenders, although some high street banks will fund large projects for experienced developers.
How does it work?
Ground up construction finance is funded in 2 main phases, the initial funds release and staged payments for development.
The initial release is used to either fund the acquisition of the site, or to release equity on day one.
The staged releases are then released at agreed milestones in the build.
The staged release payments are usually agreed at a sufficient level to cover the entire cost of the build, with the developer’s funds going in upfront towards either to purchase, or the start of works.
How much can I borrow?
Your maximum borrowing is calculated on several key metrics. They are:
What are your minimum and maximum loan sizes?
We can offer development finance from £100,000 with no defined maximum loan size.
Ground up builds often run between £1m to £10m+ and can be funded without issue.
How is my maximum borrowing calculated?
The maximum borrowing is usually based on three main points:
- Day one advance: This is the amount that the lender is happy to advance at the beginning of the facility. This part is usually limited to 65-70% of the property value, although some lenders have no limit on this metric as long as the other 2 fit.
- Loan to cost: This is how much the lender will fund as a percentage of the total project cost. This figure is usually between 85-90% of the total project cost.
Loan to GDV: This is the lender’s maximum loan as a percentage of the final project value. Most lenders will offer between 60-70% of the gross development value (GDV).
How is my application assessed?
Your application will be assessed based on a few key points:
- Location: Where the scheme is located nationally and where the site is located locally. For example, if you are building large executive houses next to a derelict pub, this is likely to impact demand and will not be considered favourably.
- The financials: A good, profitable scheme will always be viewed favourably.
- Demand for the finished product: Local demand for similar properties and strong indication that the demand is there through similar sales will help your application.
- Experience: Experience from either the developer or the professional team will help to get your application approved.
How can I repay my loan?
Your method of repaying your loan is known as your exit strategy.
While your exit strategy will be defined by whether you plan to sell or rent out the completed units, there are still multiple ways to handle each situation.
If you plan to sell the completed units
If you plan to sell, here are your options:
- Stick with development finance – If you have sufficient term remaining on your development finance facility, you can sit on the product until the units are sold.
- Developer exit loans – This type of finance, known as development exit finance, allows you to release equity from the completed units while they sell. This approach can either lock in profits, or release funds to progress into your next project.
If you plan to hold and rent out
If you plan to hold and rent out the units, here are your options:
- Buy to let mortgage – If you have built standard residential properties, then standard buy to let mortgages can be used to refinance your development loan.
- Bridging loan – Bridging loans can be used as an interim option between the units being completed and enough units being rented out for you to qualify for long term finance.
- Commercial mortgage – For commercial property, a switch to a commercial mortgage is the most viable long term solution.
- HMO mortgage – A HMO mortgage is the best option for the long term financing of multiple occupancy properties.
