Finance Roll

Is there such a thing as 100% Property Development Finance? The short answer is yes, however it may be useful to define what exactly we mean by property development finance and what we mean by 100% funding. Property development finance is the term used by lenders and brokers to describe the finance products employed to help property developers fund their projects. These projects can range from the simple renovation of a residential dwelling to multi-plot new-build schemes. A property developer can be an individual, partnership or company. Broadly speaking we can split property development in to three categories:

• A property refurbishment project would involve the purchase of a residential dwelling and straight forward refurbishment of the interior. These project usually turn round very quickly as planning permission is not generally needed.
• Property conversion projects would involve more substantial work such as an extension, conversion of an existing property into flats, or some other structural re-modelling. This type of property conversion will almost always involve planning consent, building control and sub-contractors. The developer taking on a conversion project will probably have carried property refurbishment projects in the past.
• Top of the list is the property developer who undertakes new-build schemes. Very often a site will be purchased with either full or outline planning permission. Obviously the time scale for this type of project is much longer and the developer will probably have experience in refurbishment and conversion schemes. Lenders are increasingly insisting on some form or warranty such as the NHBC or Zurich schemes, although architects certificates are still accepted.

The challenge for the property developer is to fund the acquisition of suitable property and have enough working capital left to finance the development work. Historically banks were content to lend around 65% of the purchase price and 65% or so of the build costs. However, these options were usually reserved for experienced developers or individuals with a high net worth. As with every business cash-flow is king, and having substantial amounts of cash tied-up in a property can seriously hinder business growth.

There are now several specialist property development lenders who will consider loans far in excess of the bank solution. Most of the specialist lenders will offer loans of around 70% of the site value and 100% finance for the build costs. It is very important to understand that the development costs are paid in arrears. This means that the developer will fund the works to a pre-agreed stage where upon the lenders appointed representative (usually an independent surveyor) will carry out an inspection.

On receipt of a satisfactory report from the surveyor the funds are released and the next stage of development works can start. This type of funding usually covers "hard costs" only, so professional fees such as planning, architects fees and insurance would be paid from the developers own resources.

True 100% property development finance includes the purchase of the site, the build costs, professional fees and sometimes even interest roll-up. This type of funding is available for refurbishment projects, conversion schemes and new-builds. The developer does not necessarily need a wealth of experience as the lender will monitor and support the project quite closely. The lenders who are willing to consider 100% development funding can usually only be contacted through specialist commercial finance brokers.

To qualify for full funding the project would need to demonstrate a good profit margin and be in a geographical area known to have an buoyant property market. In essence the lender wants to reduce the risk that a loan will be outstanding for long beyond the development phase.

So, in conclusion 100% property development funding does exist, whether the developer is looking for just the build costs or full funding for the whole project. Naturally these higher levels of funding come at a premium in terms of interest rates. However this should be considered against the cost of having all the available capital tied up in a single project. The main benefit for considering 100% property development funding is the ability of look at new projects whilst completing a current project.