Development Finance – What are my Options?

The ability to successfully deliver a profitable development project depends on getting the right funding arrangements in place. The decision on how to fund your project is one of the most significant challenges facing developers particularly in recent years as the market has reacted to the impact of the pandemic, Brexit, resource issues and rising costs and materials shortages.

As always however, the underlying fundamentals of the UK housing market remain unchanged. There continues to be a shortage of homes and therefore opportunities for developers undertake lucrative projects. Ensuring that your project and any finance application can withstand rigorous scrutiny will help increase the potential that you will achieve competitive finance terms.  Depending on the nature of the project, timescales, loan to value and exit strategy, there are a number of different types of finance available to developers and we look at those in more detail below.

Bridging Finance
Bridging finance, as it is commonly referred to, offers a short term flexible option for developers requiring to ‘bridge’ the gap before the next funding comes in. Typically, the term of the loan will range from a few months to 18 months. This type of finance is generally used to fund small scale construction projects and renovations, that can be completed quickly and within the term of the loan or until a longer term facility can be put in place.

Due to the shorter term of the loan, lenders’ requirements tend to be reduced and the funds can be made available at short notice – this can even be as little as 24 hours, depending on the lender (and the team of professional advisors supporting the deal)!

For all the benefits that a bridging loan can offer, there are substantial fees and interest charges which as always need to be weighed against the convenience and speed. It is usual to see a higher interest rate, an arrangement fee (often a percentage of the loan), a broker fee and of course legal fees.

Development Finance
There are various types of development finance, each structured to cater for the requirements of the particular project. It offers a longer-term funding arrangement specifically tailored to funding construction projects. The term length will depend on the timeline for the proposed construction but often will be available for up to 3 years. It is common for a development facility to release funds in various stages under a land and build facility. The land loans provides funds to acquire the site with the build facility providing staged draw downs to enable to the build to progress.  

The main types of development finance are as follows (but not limited to):

Senior Debt/First Charge – these lends generally have a lower loan to value of the gross development value although this varies depending on the lender, and the developer.

Stretched Senior Debt – this can be useful when you need additional funding over and above your senior debt or have more than one project ongoing at the same time. Generally speaking a lender will only offer this type of lending to an experienced developer with a proven track record.

Mezzanine Finance  – this type of finance can help maximise total borrowing. It is a second charge and can help to contribute towards the amount the developer has to contribute towards the project. It is often more expensive but offers a solution for many developers.

Development Exit Finance – this becomes relevant when you may want to refinance a project or when you are approaching the end of your initial loan term but not yet able to complete the sale of the units on the development.

Over and above the typical facilities for new construction sites, developers should also consider if heavy & light refurbishment lending is appropriate.  These facilities cover conversion works to existing buildings.  As they are perceived to have a lower risk profile, lenders can take a different approach to leverage.

A lender will tailor their security requirements depending on the nature of the loan. A borrower will need to ensure that they are comfortable with the extent of the security requirements. Loans will be secured against the Property by way of a legal charge but there may be additional security such as second charges on additional properties, personal guarantees, debentures or share charges, cross company guarantees and so on. It is important for both parties to be carefully advised as to the extent of the security and the implications.

Whatever the nature of your development project or funding arrangements, the team at Herrington Carmichael are well placed to help you achieve excellent outcomes. We have the specialist expertise in securing development sites, acting for both lenders and borrowers in respect of real estate finance and in dealing with construction matters. Our professional and proactive approach ensures that you can be confident that you have the right team in place to facilitate completion of your acquisition and funding leaving you free to get on with progressing the practical aspects of your project.

For detailed legal advice on acquiring and funding your development project, please contact us to speak to a member of our Real Estate team at Herrington Carmichael LLP.

Liz Hailey
Partner, Head of Real Estate
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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