Development Finance Jargon Buster

 

Here we break down the jargon that you may encounter when arranging development finance.

Building Regulations

The building regulations are the policies and rules set by governing bodies for UK building work. Building regulation signoffs are usually required at various construction phases, including before work begins, to complete the project and release the property as fit for habitation.

Compound Interest

Compound interest is the interest that has been added to a loan or deposit. This is calculated based on the accruing interest and the initial loan agreement. Depending on the compound periods set out in the loan this will increase each new period as it will charge interest rate on the interest you have already accrued.

Drawdown

The drawdown payment method refers to credit or payment that is released in sections over time. For example, you may receive 50% of funding before your project begins and the remaining 50% once you have completed a certain percentage of the project.  

Default Rate

The default rate, also known as the penalty rate, is used to two ways. Firstly, it can be used to describe the higher interest rates enforced on a borrower that has missed payments. For example, if you have missed three monthly payments, you may be charged a default rate of an additional 10% interest on future payments.

Secondly, it can also be used to refer to the amount of a loan that a lender writes off after failure to pay. For example. If you are unable to meet payments a lender may settle a default rate with you, where you will only have to pay a certain percentage of the loan back. 

Equity

Developers’ contribution to the deal.

A property developer typically puts in 20% of total costs as equity. However, lenders require a minimum of between 10% – 40% of equity as a percentage of total project costs.

Gross Development Value

The Gross Development Value (GDV) is the anticipated open-market sales value or forecast revenue of the development once all works are completed. For example, the gross development value of a new house will be the predicted market price.

Gross Loan Facility

The gross loan facility is the total loan value, including fees and interest. Therefore, if your loan is £1,000,000 for 12 months with an annual interest rate of 5%, then gross loan facility will be £1,050,000.

Arrangement Fee

The arrangement fee is an administration charge that is paid to the lender at the time of signing the agreement. This is typically treated as a set up fee and is a set percentage of the loan. Whether the fee is subtracted from the total loan repayments, or an extra cost is at the discretion of the lender.

Joint Venture Finance

Joint venture finance is where a third-party funds a development rather than you self-funding your own project. Usually, up to 100% of the development costs are provided by a finance partner. A profit share and interest may be part of the development finance structure.

Loan To Cost

The loan to cost (LTC) is a calculation used to determine the percentage of a projects total cost that a loan is covering. The higher your LTC ratio the ‘riskier’ the investment for lender. Typically, lenders will only finance a development with a loan to cost of up to 80%.

Mezzanine Finance

A hybrid of debt and equity finance, mezzanine finance is when a second lender issues junior debt as a development finance loan on top of senior debt development finance. The facility is usually used when developers want to minimise their equity in a project.

Monitoring Surveyor

The lender appoints this professional Quantity Surveyor to oversee the project from start to end. The monitoring surveyor reports on the project progress as well as proposing/agreeing to the value of the latest drawdown.

Net Loan

 The net loan is the cash available to the borrower from the development finance. The figure is the gross loan facility minus fees and interest.

Outline Planning Permission

A precursor to full planning permission, outline planning permission is used as an early-stage indication of whether full planning will be granted and dictated the general principles of how a site can be developed i.e. if you can build residential homes in that space.

Personal Guarantee

This is a legal promise by the borrower to guarantee to repay outstanding company debt on the project if the loan is not fully repaid. For example, if a business cannot repay, the personal guarantor will be the individual held personally liable for payment. This is usually the business owner or director.

Permitted Development Rights

Permitted development rights are the rules and regulations that allow specific work to be completed without the need for planning permission. These rights are dictated by Parliament and not at a local authority level. It is worth noting that these right change from development to development. For example, the guidelines for extensions to residential properties are different from those of commercial.

Planning Gain

 The planning gain refers to the increase in value of the site, created when planning permission is granted.

Return On Costs

Return on costs is used to determine if the profitability of the project is sufficient for it to be funded and if the purchase price is correct. Projects typically require a 25% or more return of costs to ensure they are covering all costs and making a profit.

Rolled-up Interest

An interest roll-up is an option where the interest is paid at the end from a sale or refinance rather than being paid as ongoing payments as part of your agreed repayment plan.

Senior Debt Development Finance

The most common type of development finance, senior debt finance is a first charge development finance loan. These loans typically cover most of the funding needed to complete a development project and allow work to begin without personal funds being used.

Stretched Debt Development Finance

This is a first charge debt with enhanced leverage compared to senior debt finance, enabling property developers’ access to a greater level of funding – it is typically at 90% Loan to Project Cost.

Second Charge

The second charge describes any further monetary advance such as loan, that is taken out after a first charge loan. An example of a second charge loan is Mezzanine finance which often used to minimise the amount of equity a developer has in a project.

Term

The term is the agreed length of the development finance loan, usually set between six and 24 months.

Tranche Payment

Similar to the drawdown method, tranche payment is the staged release of money that funds the property development during the life of the project. For example, you can receive a set sum of money each month until the project is complete.

WHAT OUR CUSTOMERS SAY ABOUT US

"A challenging site like no other with every inch of the plot being built on and 12 apartments built-out through a driveway 2.5m wide off of a main high street with limited access rights, not to mention all the complexities associated with 13 Party Wall Agreements. Most lenders would not have had the vision for the scheme or the confidence in Spiller Builders to build out the scheme.  I just wanted to say how helpful the entire BLG team have been during the build. A very approachable and knowledgeable team, with a “can do” approach to lending. We will be looking to do more business with you for sure."

“We have used BLG for development finance for over 8 years. During that time we have found their knowledge and expertise in the property development industry to be second to none. Their loan process, pragmatic and flexible approach to lending and flexibility when required has supported our business needs throughout the period and provided us with support to deliver new homes in Bristol and the surrounding areas.”

“As property developers you never know the curve balls that you may get and a project that is great on paper may prove a bit more tricky.  This happened to us on a project that BLG have funded and throughout they have supported us.  Our business likes to be collaborative and when we hit those tough moments it really felt like we were working as a team with BLG.  If you have a decent project you can get it funded, but what you really need is a business that is there to support and advise you as well.  For us on this project it was BLG.”

“I approached BLG Development finance with an opportunity I had in Chesham, Buckinghamshire, to build 5 new build houses in 2021. My main contact was Anil Bains who is a Director covering Asset Management. Within very quick timescales, BLG provided me with indicative quotes in regards the finance levels they could offer me. Having considered those levels, I requested a valuation to be carried out which again was dealt with swiftly. We proceeded to completion. The build went very smoothly with monthly monitoring being carried out by BLG and monthly drawdown requests dealt with in a very timely manner. Due to a difficult time generally in the market in regards selling, I was in need of a six-month extension to the loan which again was appraised very quickly and granted. Having dealt with numerous funders over the last 20 years, I can only speak highly of my personal experience with BLG and would very confidently work with them again on any future projects. “

"From our side it has also been a pleasure working with BLG and the team there. We have found you easy to deal with, proactive in resolving any minor issues that have arisen through the project and shown great flexibility in working with us as a partner. We will certainly like to work with you on future partners."

“I really appreciate your hard work. We really like the way you communicate & I must say I haven't seen many people who are that approachable.”

“A very efficient processing team, dealing with the DD once deal credit approved, through to completion”

“Many thanks for your efforts on this one and getting it approved and sorted so swiftly, very much appreciated. I am sure I will be speaking to your over the coming months.”

“We had other funding options, but chose to use BLG again, as we work well with the team, who always provide very clear information and advice with a friendly approach throughout the funding process. Very efficient and always very helpful.”

“Many thanks Anil, it’s been a real pleasure working with BLG so far.  We’re lining up the next project too”

“We would recommend all staff we have dealt with at BLG, as we are very satisfied with the team and the initial offer/terms presented, then you and the funding team, through to the draw down team at valuation stage.”

“All documents are clear and the way you keep clients informed, all the way along the funding process, is refreshing for us”

“With regard to what should be improved at BLG, we work with many lenders in our business and we do not get the help and response we have had on the two projects with all at BLG on our funding for our developments.”

“We would particularly mention Dave Edwards and Tom Pitts as being central to having a smooth working relationship and being positive and helpful at all times. Their guidance in helping us navigate the project from inception to completion was invaluable. As was their patience, particularly at the beginning. We look forward to many future projects with the BLG team.”

“We would like to express our appreciation for your support on our development in Bristol. We were very pleased that, from the outset, you shared our vision of the project to convert a dated but classical building, that had outlived its usefulness as a school, into unique luxury apartments with views overlooking the city. We found our dealings practical and streamlined. Monthly payments were processed in an efficient and timely manner.”

“BLG are very good at communicating with clients and all documents are very clear and all at BLG are always happy to help.”

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