One of the major problems with property development lenders is that it can be a little awkward to stay abreast of all the different nuances, developments and changes.
Constant comparison and monitoring can prove a tall order, but it can be rewarding in the form of insights into the different lenders’ pros and cons, and getting the cheapest deal. Most importantly, you need to understand how the lenders operate, so here’s a breakdown when it comes to property developer finance.
Standard property lending is calculated via a percentage of the property value, with the value dropped to 80%, to take into account repossession and low resale value risks.
It’s done differently in development lending. Funding is calculated on the future site value, after the development, with lenders frequently capable of lending anywhere up to 75% of the final site value.
If the property developer needs to purchase the land, they will need to provide a cash deposit to the lender, generally to the tune of 25% to 50% of the purchase price. Lenders covering all of the building costs are fairly commonplace nowadays, but for some larger projects, an equity stake could also be required from the borrower or a third party.
The Loan to Cost (LTC) ratio is also used by funders to state the percentage of total costs they are willing to provide. Generally speaking, these range from 75% to 95%.
That means that in a common, 30-30-30 situation, where land, development and profit are all £1m each, total costs are £2m, which in a 90% LTC ratio means the funder provides £1.8m, and the developer needs to come up with £200k, which is also 60% of GDV.
LTC percentages are higher than GDV percentages in general, because a higher GDV percentage would badly impact profit margins. With just 75% of GDV, that leaves just 25% gross profit to the developer.
The process timeline for raising funding is almost the same as a standard property transaction. Once the funding gets approved, the valuation and legal process begins. Once all that’s squared away, the funding is confirmed, and the lender will register a charge on the security in the Land Registry. Four to eight weeks is reasonable, but it can be more drawn out if the borrower’s solicitors aren’t synced up, timewise.
In essence, the developer usually does not directly see the funds. The builder deems the monthly work to be done, with an appointed surveyor monitoring and confirming the progress. Then the funder pays the builders and contractors.
Interest – Treat with Caution
Lenders offer some wildly different rates, especially between advertised monthly and annual rates. Simply put, in most cases, 12 times the monthly interest does not equal the annual interest. Some lenders charge the monthly rate like a credit card, only on what you’ve spent. This means the annual rate is much lower.
How Do Facility Fees Work?
Some funders utilise extremely high exit and arrangement fees in order to compensate for low monthly rates. Generally, exit and arrangement fees individually come to around 1-3% of the facility.
Sometimes the interest rate can seem extremely high, but it’s really just a lack of exit fees, for example. For reasons like this, you absolutely have to put together an extremely detailed spreadsheet comparison of all your different lending options, in order to understand and be on top of everything. This spreadsheet needs to note the costings and rates at all the stages of the funding.
Why is Phased Building So Much Cheaper?
If you phase your building development, it can prove cheaper overall. The blocks of funding required are lower, meaning lower fees, as well as a lower annualised rate. It renders the chances of being approved higher, because it’s a smaller amount, too. If you still need more funding, there are options out there like mezzanine funding, and equity investment options that can help tide you over.