Property development loans are released using stage payments. Development finance lenders will always want to make sure there is sufficient value in the site and that the funds are being used as agreed.
Securing the site
The lender will usually release a set amount upfront to allow the purchase to be completed. This is usually around 65-70% of the current value of the site. From this figure, any interest and charges are deducted, leaving you with the net loan.
Stretch senior, or mezzanine finance may allow you to borrow more money upfront, depending on the scheme.
Payments are usually released at agreed stages in the build to allow work to continue, once the current work is signed off as complete. Sign off is managed by a monitoring surveyor or quantity surveyor, who is instructed by the lender to ensure the development is on track.
Each lender has their own preference between using an Independent Monitoring Surveyor (IMS) or QS.
The checks undertaken by the QS or IMS generally include considering the work completed, both in terms of progress made as per the previously agreed build schedule, along with the quality of the work and cost management.
If there are discrepancies in the work completed, compared to the plan agreed, stage payments can be delayed. The aim is always to ensure the stage payment is there on time and that construction is never interrupted due to a delay in receiving funds.
The differences between using a QS or IMS
Lenders who use a QS during the build tend to focus on the value and financial position of the scheme when it completes – as long as everything remains on track.
An IMS is there to keep track of the current value of the site throughout the build, as well as the progress according to the schedule of works and costs.
Should value not increase sufficiently according to the monitoring surveyor, it may become difficult to draw down further funds and continue the project. For that reason, using a QS is usually preferable.
Cash flow management
Cash flow is vitally important in managing a development project. There is a tendency to look at the initial deposit needed to purchase the site and whether the loan gives you enough in total to finish the build. Managing cash flowing throughout the build is vitally important. To check cash flow management, the lender will compare your spend and progress against schedule of works, backed up with a cash flow forecast. Ensuring that your figures are accurate on application will really help you out here, once the build is progressing.
By following this advice, you will be able to judge exactly when cash input will be needed for the site. This prevents problems further down the line and is far more useful in the real world than relying on a draw down schedule set out by the lender.
Accuracy of build schedule and costings
The accuracy of build schedule and costings is vital to projecting cash flow. Where funds are tight for a project, this becomes even more important. Although lenders will be happy to release equal amounts monthly, some months will be particularly expensive. As a result, building can sometimes halt as funds are being waited on.
The flip side to this is that in months where you will be spending less, funds will be drawn down that aren’t required. This can be just as big a problem, as drawing down too much money, too quickly will result in more interest being paid, reducing the profitability of the project.