Property  development finance is used to build a new property or alternatively to renovate / convert an existing property. As the property being developed does not yet exist (new-build), or will be significantly changed from its current condition (refurbs and conversions), the development loan is granted on the cost of the development as well as the projected future value of the property when it has been completed.

In all cases, the loan to cost or LTC (the size of the loan against total deal costs) and loan to gross development value or LTGDV (the size of the loan against the end value of the property once constructed), the  borrower’s track record in the sector and their ability to repay the borrowing are all considered during the assessment of loan applications.

The interest on the loan will be rolled-up or capitalised. This means the interest charged by the lender is added to the loan balance rather than paid as a monthly or quarterly instalment. This will aid cashflow during the construction or renovation period with the total interest charged being paid when the property is sold or refinanced to repay the debt.

Lenders normally consider a number of criteria in the decision process before granting a development loan including:

• The type of construction of the property being developed
• The location and commercial viability of the development
• The credibility of the exit strategy (e.g. saleability of similar properties in that location)
• The availability of a legal charge over the property, and personal guarantees
• The professional team involved in the project
• Evidence of ability to pay the deposit
• The nature of, and domicile of, any legal business entities involved in the application
• The borrower’s credit history
• The status of the planning consent

There are several steps in any development finance deal. A typical transaction process would look like this:

• Initial enquiry from borrower via Snowball with an application submitted to lenders for consideration
• Lender provides an agreement in principle – indication of terms and conditions
• Lender will undertake their detailed appraisal of the proposal which would require a professional valuation and a site visit
• Lender makes formal loan offer – accepted by borrower
• Lawyers are appointed – to act for the client and the funder to undertake legal due diligence leading to exchange of contracts
• Completion – first drawdown of funds to buy land or start construction
• Additional drawdowns to fund build costs – Interest will only be paid on the funds that have been released, so unlike a traditional bank loan, there are no monthly repayments, and full repayment occurs when the property is sold at the end or the loan is refinanced elsewhere
• It is common for a lender to schedule visits at different intervals to get updates on how the development is going and ensure all is going to plan and on schedule.
• Repayment of loan – usually when the development is sold or refinanced. Loan terms can typically range from six to 18 months, with a few lenders offering development finance for 24 or exceptionally 36 month terms.

Lenders require additional documentation in support of a development loan application, and whilst each lender has their own individual criteria the key paperwork will include:

• Details of planning permission and drawings
• Details of planning restrictions or levies that may impact project profitability
• Value of the current site and/or properties on it
• Complete breakdown of all project costs
• Details of borrower’s development experience and examples of previous projects
• Schedule of works (operational calendar) broken down by phases
• Details of architects, contractors etc.
• Proposed exit strategy
• Projected gross development value – what will it all be worth when completed?