Obtaining Property Development Finance By Sean Horton At Isnare.com Ezine Articles

Whether undertaking a small-scale refurbishment or building a new multi-million pound complex, if the developer does not have all the money to fund the project, then the balance required could be obtained through one or more lenders. Traditionally, high street banks were used but invariably would only agree 50/50 deals (50% acquisition 50% build costs), increasing this to 70/70 deals for the experienced developer. This type of loan is usually referred to as ‘senior (bank) debt’ but still meant that at least a 30% deposit was required.

Should 100% funding be desired, then property development finance could be the answer which is a mixture of short and long term loans covering both the acquisition of the site and the associated building costs. Often with all the interest payments aggregated at the project’s conclusion when the properties are either refinanced or sold.

Property development finance can comprise of a mixture of elements including debt and equity finance (share capital where the investors receive a share in the ownership and dividend payments depending on the profit made, this is also known as risk capital). It can also include mezzanine finance which has the characteristics of both debt and equity finance, has higher interest and is payable after a term of 7 to 10 years. All these elements can be combined with primary lending sources to form the deal. Although no deposit is required, it does mean that the developer could have to pay over double the interest rate to that offered by traditional sources. Therefore, it would be prudent to assess accurately if the development will yield a good profit before proceeding.

When constructing a proposal, using terms and a format preferred by the potential lenders, could greatly enhance its chances of being successful. All figures ought to be realistic, with at least a 10% tolerance to allow for a downward trend in the property market. The inclusion of a contingency cost of 5% to 25% to cope with any escalation in costs or unexpected problems is also likely to be favourably received. In addition, having all the valuations within the proposal confirmed by an independent surveyor could be seen as a sensible practice. If the thought of assembling a proposal and the task of searching the marketplace to locate the best property development finance seems quite daunting, then using a commercial mortgage broker could resolve this predicament.

A commercial mortgage broker is more likely to have a greater knowledge of the complex options involved with property development finance and enjoy easier access to the marketplace. The developer could also benefit from their experience when creating a proposal, ensuring that the opportunity is attractively presented and in a language easily understood by prospective lenders. For example, having the developer show financial commitment to the venture by covering the associated professional and legal costs involved could be deemed more tempting.

Even if the developer is inexperienced or does not have a good record of accomplishment, a commercial mortgage broker could negotiate with a quicker delivery a better property development finance deal that could increase the profit, and give support in areas such as project management and offer alternatives and strategies should problems manifest during the project.

They can often provide guidance to help ensure that the final debt to GDV (Gross Development Value - the forecasted sale value after the building phase is completed) is no greater than 75-80%, thus making the proposal more appealing and with the prospect of yielding a feasible profit. After all, at the end of the day, making a profit is normally the driving force behind any project and an important factor when choosing property development finance to realise such a scheme.

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