In recent years and following the financial crisis, development finance has become somewhat hard to come by. It used to be a case of simply going to your mortgage lender and procuring the finance you desired (provided your development was realistic of course!). However, these days mortgage and development lenders alike are asking a lot more from borrowers in terms of background checks, experience & income requirements and are seen to be operating on a far more stringent box-tick approach. This lack of willingness to be flexible from the larger banking institutions has created a new breed of development lender who has the ability to act quickly and flexibly for their clients, which is where most developers now go for their financing needs.
What will I need to get development finance?
Depending on your requirements there are a number of different lenders to suit your needs. However, each of these lenders will have different requirements, which is why I have put together a brief list of requirements that most lenders will want. Of course, this varies often dependent on the size of your development but these are all sensitive things to have in place nonetheless.
Some experience in development and evidence of experience
A site with outline or detailed planning permission
Discharge of relevant planning conditions
Schedule of works
Schedule of costs
Structural Warranty Insurance (for instance Buildzone)
Developers all risk insurance
Most lenders will expect a minimum 30-40% deposit on the purchase of the site however will usually be able to fund 100% of the build costs
Where do I find lenders?
The problem you will find when looking online is a number of brokers the charge high fees, guised as principal lenders and comparison sites alike. Although they can offer sound advice and get you good deals with associated lenders, you are often better off going direct. Do your homework – find a few lenders that lend in the range you seek and get three proportional quotes. It's easy to be mislead by low initial rates however make sure you query what other fees that could be charged and exactly what happens if you say, you are late to repay by a month. Afterall – when was the last time you completed a development that went exactly as planned?
What are the risks?
As with any business opportunity there are inherent risks. When financing your development using a short-term lender there are a number of risks to be aware of. Firstly, you should make sure that you can rely on your lender to provide the drawdowns in a timely manner and that the conditions / requirements for these drawdowns are abundantly clear and well documented. Your solitor should do this job for you but it's always prudent to run through the documents to make sure you understand it too. Secondly you should make sure you are clear on all events of default and what the penalties for going into default are. It may be beneficial to the lender when you go into default because for instance they will earn more interest on a monthly basis when you are (it is often double the standard rate). Although this is a very cynical view I have first hand experience of lenders behaving in this manner so it's important to remember a lender is a lender, not your friend. Lastly, make sure your schedule of works or timetable leaves plenty of room for error. The reason that 75% of development facilities go into default is due to facility expire. This could be down to a number of things but more often than not it's a simple case of the developer being too optimistic with the amount of time it will take for a sale to go through.
Getting financing for a development can be challenging at the best of times but being prepared for every question a lender requests will put you in good stead. So, before you start going to various lenders to seek quotes have those key elements above to hand.