If you are a property developer or housebuilder looking for finance, you undoubtedly have come across the many names given to different types of development finance and associated terminology that you won’t find in any dictionary. This language can quickly leave you feeling completely confused and lost, as another roadblock hinders getting your project off the ground.
Here we break down the jargon and terminology so that you can understand what types of finance are available and how much you can borrow.
Senior Debt Development Finance
Senior debt development finance is the first change against an asset. The finance covers typically 100% of the construction costs and provides part of the money required to purchase the property or its existing estimated value. This type of development finance usually goes up to 50-65% of GDV.
First charge / senior debt – This term is used to describe the finance from the lender who first lends money against the asset (land and property). This does not mean that no other lender can lend against the same assets later on. If another lender does lend against the same asset, then this is called a second charge.
GDV – The gross development value is the development’s sales value once all works are completed, and building completion certificates are gained.
Senior debt development finance example: Developer XYZ has a project with a gross development value of £1,000,000, including £300,000 of estimated construction costs. The maximum development finance available is £650,000 (65% of GDV). This amount includes £300,000 development costs, leaving £350,000 of finance available to go towards purchasing the property.
Mezzanine Or Junior Debt Development Finance
Mezzanine development finance is a second charge against an asset. The mezzanine finance can usually take the overall lending up to 80% of GDV. The solution is often used by developers who want to top-up the level of finance on a development project, typically to improve cash flow and consider additional development projects.
Second charge / junior debt – This term is used to describe a second loan secured on the asset. The finance is offered by a different lender to the one who provided the first change. Should the development project fail for any reason, then the senior debt takes precedence over the junior debt.
Mezzanine development finance example: Developer XYZ has a gross development value of £1,000,000 and senior debt development finance of £650,000 (65% of GDV). Mezzanine finance of £150,000 (15% of GDV) is available, taking the total lending to 80% of GDV.
Stretched Senior Debt Development Finance
Stretch senior development finance is a first charge loan like a senior debt. However, it offers lending to the value of senior debt and mezzanine debt combined, typically 70-80% of GDV. The benefit to the developer here is that there are fewer associated costs, with one set of lawyers and one valuation, which also speeds up the process for the finance being approved.
Stretched senior debt development finance example: Developer XYZ has a gross development value of £500,000. The finance available equates to £375,000 (75% of GDV).
Super Stretch Development Finance
Super stretch development finance is a solution that allows developers to borrow up to 90% of the loan to cost (95% including rolled-up interest). The solution combines first charge senior debt finance of up to 80% of costs with second charge (third-party) mezzanine finance of 10%. Super stretch loans are often used by professional house builders to minimise the amount of their own money in a project, to improve cash flow, and run multiple projects at one time.
Loan to cost – The loan to cost is the percentage the lender is prepared to offer against total development costs.
Rolled-up interest – Rolled-up interest is paid at the end of the loan.
Super stretch development finance example: Developer XYZ has a total development cost of £500,000. The super stretch finance available is £450,000 (£400,000 senior debt + £50,000 mezzanine debt).
Development Finance With BLG
Our expert financial advisers and support team are ready to answer any questions you may have. Contact our team today to find out how you can get the finance you need for your development project.