How to Get a Development Loan Explore this write-up till the end to learn the best way to get a development loan. A development loan is a type of real estate loan that finances the purchase and build costs associated with a development project (be it a new build, conversion, or refurbishment). This type of loan is usually a short-to-medium-term bullet loan.
How To Get A Development Loan
Development finance is a short-term funding option, usually lasting between 6 and 24 months. It is designed to help with the purchase costs and building costs associated with a residential or commercial development project.
However, it can be a new build, conversion, or refurbishment, covering a single unit through to multiple units built across a number of phases.
Two parts of the development loan
A development loan comes in two parts. They are:
To purchase the site: The first stage of the finance will often be used to assist with the purchase of the development site. It could be land on which a number of new properties will be built or an existing property that will undergo a refurbishment.
To fund the building costs, The second stage of the loan will be used to pay for the costs of the building work associated with the project.
How To Get A 100% Development Loan
Although some lenders might offer you a development finance deal based on 100% of the loan to cost (LTC), i.e. how much the construction work will cost, there are others who may be able to provide you with 100% of the overall capital needed, but only in specific circumstances.
However, the two major ways you could convince a lender to offer 100% development finance are by putting up additional security or entering into a joint-venture agreement.
Setting up extra security
To get a 100% development loan deal, some lenders will want you to secure the loan against another property, more than one property, or valuable assets you own and hold sufficient equity in. However, meeting this criterion to get capital with no deposit may be possible.
Moreover, agreements, where multiple properties or assets are used as security, can be risky for the borrower because, if the exit strategy fails, the borrower could end up with multiple repossessions. For bespoke advice about development finance security, get in touch and the advisors will help you weigh up the level of risk and then suggest ways you can safeguard yourself against it.
A joint venture development loan
Some development finance lenders may be willing to offer you a 100% deal if you enter into a joint venture agreement with them. With this, the provider offers 100% of the build and purchase costs in exchange for a profit share at the end (usually 40–50%). It’s common practice for the lender to set up a special purpose vehicle (SPV) in which both parties are involved and oversee the construction process closely.
However, it is mostly a viable way to secure development finance without a deposit, although most lenders charge interest at a higher rate for joint venture deals.
Development Loan Eligibility Criteria
As development finance applications are mostly assessed on a case-by-case basis, there’s always a chance a provider with a high appetite for risk will consider adjusting the percentage of the costs they’re willing to cover if you meet their eligibility criteria. Most lenders prefer customers with the following;
- Have a strong exit strategy. You’re unlikely to get a development finance loan without having a strong exit strategy, and this would most commonly be a sale or a remortgage. So, the more confident the lender is that your exit will cover the loan plus interest, the more likely they are to let you borrow the amount you need at a favourable rate.
- A healthy deposit or good security. Having a good, sellable property to secure the loan against can minimise the level of risk, as can putting down an extra deposit.
- Have perfect credit. Bad credit is usually only a deal-breaker for development loan lenders if it puts the exit strategy in jeopardy, but if your credit history is flawless, this can help convince the lender that you’re low risk.
- good industry experience. Although there are development finance loans for new investors, having a strong track record in the property will usually help convince the lender that you’re capable of achieving your plans.
Above all, some lenders will also expect you to produce a business plan before rubber-stamping the deal.
What is needed for development finance?
- Details of professionals involved in the project.
- Details of your previous development experience.
- A completed Asset, Liability, Income, and Expenditure Summary (ALIE)
- A planned exit strategy for the project is being carried out.
How do you fund a development project?
Based on the size and risk of a project, a traditional bank note accounts for roughly 60–80% of the project’s capital stack. However, a developer must either fund the remainder of the project through alternative debt sources, sponsor equity (their own capital), or some alternative means of equity financing.
What is the meaning of development finance?
Development finance is the use of public sector resources to facilitate private sector investment in low- and middle-income countries where the commercial or political risks are too high to attract purely private capital.
What is the role of finance in real estate development?
Project-level bank finance basically requires the developer to contribute equity, which is often provided in the form of land previously bought by the developer for the project, and to achieve certain thresholds of pre-sale agreements with prospective purchasers, both as a contribution to equity (purchasers