As a property developer, you’re likely aware that development projects can be unpredictable, even if you have years of experience under your belt. Unexpected setbacks, such as delays and rising costs, can make it difficult to complete a project on time and repay your initial loan. In some cases, lenders may not be able to offer an extension or forbearance, and you may run out of funds to complete the project if you’re self-financing. Fortunately, developer exit finance can provide a solution to such situations, helping you to save your project and avoid financial losses.
What Is A Development Exit Loan?
The development exit loan serves as a form of bridging finance aimed at supporting developers as their project nears completion. By replacing the current development finance, it lowers finance costs and releases additional equity to aid cash flow or for subsequent projects.
This type of loan is typically used when a developer encounters unforeseen circumstances. For instance, cost overruns, delays, or changes in the market that make it difficult to pay off any outstanding loan on a recently completed or nearly completed property. Instead of abandoning the project or continuing to invest additional funds, the developer can exit the project and recover some or all their investment through a developer exit loan.
The loan is usually secured against the property being developed, and lenders may also require additional collateral to mitigate the higher risks associated with early exits. However, the loan terms can be flexible, allowing the borrower to repay the loan over a shorter or longer period, depending on their needs.
Why Are Development Exit Loans Used?
A developer exit loan can provide additional funding, additional time, or both, to complete a property project with the end goal of exiting the loan and earning a profit. These loans can be useful in situations where the project has experienced setbacks due to unforeseen circumstances, such as insufficient contingency planning, events outside of everyone’s control, or miscalculations.
In the past year, there has been a directionally 50% increase in developer exit loan business. This is primarily due to developers exhausting their own funds and original lenders being unable to extend the loan term if the project is not completed, often due to restrictions imposed by their own funders.
Who Offers Developer Exit Finance?
Developer exit finance is not a widely known financing option since not all property finance lenders offer it. Generally, it is provided by lenders with more diverse and flexible funding lines, allowing them to cater to a broader range of borrower situations. These loans are often offered by lenders with specialised expertise in the development sector, rather than lenders who solely provide bridging loans. This is because the lender needs to possess a deep understanding of how to structure more complicated cases and have the necessary development experience to evaluate the build and help in completing it.
Who Can Use A Development Exit Loan?
A development exit loan is generally provided to developers upon reaching practical completion of a property. This loan option is particularly useful for developers who are faced with unexpected challenges, such as adverse weather conditions, unanticipated expenses, or unforeseen issues that can significantly affect the project’s timeline and budget. In such situations, developers may find it challenging to repay any outstanding loans on the property, and a development exit loan can offer much-needed support. By refinancing the current development finance and providing additional funds, this loan option can help cover the unexpected expenses and provide relief to the developer. This allows them to successfully repay the loan while minimising the financial risks associated with the unforeseen circumstances.
Can The Property Be Considered Wind And Watertight?
When considering a developer exit loan, one important factor to determine is whether the property in question is wind and watertight. This means it has been constructed to a point where it is resistant to the elements, such as wind and rain. This is typically achieved when the property is sealed against water and air infiltration, and the roof, walls, and windows are properly installed to prevent leaks.
When a property is wind and watertight, obtaining a developer exit loan is a straightforward process with minimal risk. These loans function similarly to standard bridging loans and can be available at similar rates and terms, up to 75% loan-to-value. This is because the property has already been built, and valuations at this stage are typically accurate.
However, if the property is not wind and watertight, the process becomes more complicated, although some lenders can still provide assistance. These cases would typically fall under the lender’s developer funding range and require more customized underwriting and development expertise, but it remains possible to obtain financing.
If your property development has been completed but has yet to be sold, and the repayment of the initial development funding is due, a development exit loan could be a viable option to consider. These loans can help you get your project back on track, by providing additional time to sell the units with a financing structure that is flexible, fast, and cost-effective. The added time can be incredibly valuable in terms of maximizing the returns at the end of the project. With a development exit loan, you can take advantage of the benefits of a longer-term financing arrangement, which is typically easier to manage and comes with lower borrowing costs. This type of loan can help you achieve your project goals while mitigating any financial risks associated with the sale of the property.