With numerous TV programmes on how to make money in property development, it is easy to see why many people want to join the club. You may have a building vision that you want to turn into a commercial reality. However, in order to fund a property development project, the investor or developer need the funds to complete the project.
Development finance is a loan given for the refurbishment or development of residential or commercial properties. Lenders will consider the estimated value of the property after the building work before giving the loan – after all, this is all about making money.
Before any property developer applies for finance, they must first ascertain the level of development work required, as this will determine the level of funding required:
- Light refurbishment – aesthetic rather than structural, this level of refurbishment is generally limited to internal work such as walls, floors and ceilings
- Heavy refurbishment – in addition to aesthetic improvements, a property may also require partial demolition, rebuilding, plumbing and electrical work
- Ground-up development – starting with a plot of land, the developer will build the property from scratch
Development finance is required to fund ground-up development, with light and heavy refurbishments generally funded through a ‘refurbishment bridge’, which covers the costs of between 3 – 24 months of building costs. In some instances, a refurbishment bridge can usually be converted into a standard mortgage at a later date.
What types of finance are available to fund a development?
There are three main types of development finance available:
- Commercial mortgage – suitable to purchase and develop any property which is not classified as a residential property, such as offices, shops, warehouses and restaurants. Commercial mortgages are available to both established and new businesses, although fees and rates are higher than a residential mortgage
- Auction finance – a property purchased at auction will need to be aid for within 28 days, which may not be enough time to arrange a mortgage. Auction finance provides access to funds quickly, sometimes within a week. Some auction finance lenders also provide an ‘agreement in principle’ assuring finance prior to the auction date,
- Bridging loan – if short term funding is required to pay for associated building and development costs, a bridging loan may be the most suitable means of finance
If a property developer has the experience, they can use any equity in their existing property to secure further lending without requiring access to cash.