What is Development Finance?
Development finance is a type of lending that helps businesses, entrepreneurs, and property developers to access funding for development projects – both residential and commercial. It is a more specialised form of finance which is mainly targeted towards development projects such as construction, refurbishment, and renovation. This type of funding is often used when traditional loans and other forms of financing are not available or not enough. The loan is paid in tranches as the development progresses and is typically repaid from either sales or refinance of the property.
Who Can Take Advantage Of Development Finance?
Property developers, businesses and entrepreneurs who need funds for their development projects can take advantage of development finance. This type of funding is typically used to fund construction projects, convert existing buildings into flats, or convert business premises into offices, amongst other things.
What Types Of Projects Are Eligible For Development Finance?
Development finance can be used for a wide range of projects, from new builds, conversions, refurbishments, renovations, and extensions. Development finance is typically available for projects such as residential and commercial property developments, and leisure schemes, amongst others.
How Does Development Finance Work?
Development finance works by providing money to the borrower, usually in the form of a loan. The value of the tranches relates to the value of work completed and is typically paid after the work is completed. This money can then be used to fund a specific development project, and not for general use by the borrower. Development finance typically consists of two components, with one being for the development costs and another typically for part of the land cost. The loan can be repaid by sales or refinance of the project.
How Much Can You Borrow For Development?
The amount that can be borrowed for development typically is a percentage of the end development value – e.g., Loan to Value (LTV). Typical ranges of loan limits would be 50-70% loan to value. A typical development loan would require a first charge legal security over the development.
What Is Usual Term For Development Finance?
The repayment term for development finance can vary, depending on the project and the lender. The term of the loan needs to be sufficient to allow time to commence works, complete the construction, and have time for the sales or refinance to complete.
What Are The Advantages Of Development Finance?
Development finance offers a number of benefits, such as being able to access financing for projects that traditional lenders may not fund. It also allows for flexible repayment amounts and term, meaning borrowers can choose to match the loan drawdowns to the cashflow needs of their project and thus minimize borrowing funds in excess of when it is needed.
Can You Get 100% Development Finance?
In most cases lenders require a borrower to have a proportion of the total project costs to be provided by the borrower – this could range from 5-40% of project costs. If a typical development loan is for say 70% loan to cost (LTC), then the remainder is the developer equity in the project. Many lenders allow this developer equity to be part funded by mezzanine finance. Where a lender lends more than 70% of project costs, they are beginning to take equity risk and the fees increase proportionally. In the case of the project being 100% funded by a lender, then the lender is taking all of the equity risk. BLG will lend typically up to 90% of the project costs, although this can vary depending on the details of the project.
How Much Cash Contribution Do I Need For Development Finance?
The amount of cash contribution that is required for development finance can vary depending on the project and the lender. As mentioned above this can range from 5-40%.
What Is The Difference Between Finance And Development Finance?
The main difference between finance and development finance is that the latter is used specifically for development projects. Finance can be used for a variety of projects, from buying a car or a house to starting a business. Development finance, however, is focused solely on development projects, such as constructing a new house or renovating a business premises.
How Do You Repay A Development Finance Loan?
When the development project has completed, the borrower will typically need to repay the loan. Repayment of the loan is typically from sales of the units in a project or the refinance of the project. During the life of the project interest owed is usually rolled up monthly and added to the loan – it is then repaid with the principal of the loan.