Property Development Finance
Property Development Term Loans are made available, for the following types of project:
- The development of residential houses, bungalows, flats or apartments on land with the appropriate planning permission in place.
- Conversion of existing dwellings to residential units with the appropriate planning permission.
- Refurbishment of existing dwellings with the appropriate planning permission if applicable.
- Completion of existing ‘distressed’ developments subject to the availability of current and satisfactory monitoring reports.
- Conversion of Commercial and Office Space to Residential Dwellings
- Completion of Commercial Units, Office, and Mixed-use Schemes, new build Hotels, student accommodation etc. with management or sale agreements in place etc.
In the main a commercial development loan will be secured via a first legal charge on the site and the development as it progresses. This type of funding would generally be referred to as the ‘Senior Debt’ on the project and would in most cases be limited to a facility equivalent to between 60% to 70% loan to gross developed value (LGDV) of the completed properties or to a maximum 90% loan to overall cost (LTC) of the project .
There may be cases whereby you cannot raise sufficient funds over and above the senior debt provision to ensure the project goes ahead. In such cases you may have a number of options available to get the project moving.
Whereby a third-party lender provides the necessary top up funding behind the senior debt provider to ensure the project can be completed. The Mezzanine funder would have a second charge on the project behind the senior debt provider and therefore this is considered very high-risk lending and charged at high rates of interest. Mezzanine lenders do not allow their money to be taken “last” to reduce the overall cost of borrowing and will stipulate their monies are drawn in corresponding percentage with the senior debt.
The terms and interest rates charged reflect the higher risk profile and a typical mezzanine loan would be charged in the range 1.5% to 3% per month flat rate. Generally the mezzanine funder would also require you to be contributing a minimum of 10-15% of the total funding required into the project in addition to the senior debt provision.
Stretched Senior Debt
An increasing number of niche and specialist lenders in the property development environment will offer you a facility termed ‘stretched senior debt’. This is effectively a loan provided by one lender yet structured at two rates of interest. The senior debt offered at the lenders normal rate of interest and an additional slice (the mezzanine slice if you like) offered at a higher rate of interest to reflect the higher risk. The rates are then “blended” to give a rate on all the money for the whole project.
SPV / Vendor Partnership
Increasingly popular ‘marriages of convenience ‘ where a site owner will partner with the experienced builder / developer in the creation of a ‘Single Purpose Vehicle’ (SPV) which is a business entity created for the sole purpose of completing the development.
The benefit to you is that the land when transferred to the balance sheet of the SPV from current ownership would be treated by the lender as your contribution to the project, subject of course to their being no loans, mortgages or liens secured on the site as the proposed lender would require a full and unrestricted first charge on the site.
Lender / Borrower Joint Venture (JV) Arrangements (Equity Shares)
We have access to a small but growing number of specialist lenders who will consider entering into a JV arrangement with the borrower.
Under these arrangements the lender will fund the site acquisition and ongoing development at their normal lending rates and will also take a share –usually on a 50:50 basis or 60:40 – of the overall profit generated by the development.
In such situations the lender will place a great deal of emphasis on your background and experience and their overall confidence you are delivering the scheme on time and on budget.
Lenders tend to want to see a lot of smaller value properties built (not a single high value property) to make the sale process quicker. They will also decide on the equity split on day 1 so if the costs for the project over-run or the sales proceeds slip this will be at your cost and not the lender.