The subject of funding development projects can often have the greatest range of clients and, in particular, their experience and knowledge. The spectrum of Development Finance clients is wide. They can range from someone looking to build their first property to an established developer looking to build a large block of flats. Below I have outlined some key areas which development lenders use to make their lending decisions.
Several lenders in the Development Finance sector like to see that clients have previously completed projects. In particular, this is the case if they are proposing to build multiple properties, complex builds etc. Quite often, the experience question is the determining factor in deciding which lenders are suitable. Therefore, evidencing past projects including property refurbishments can be useful. Always keep records and photos of any projects.
Should clients have no experience of building at all, yet the other underwriting requirements are satisfied, then some lenders will be able to lend and focus their experience question on the building contractor. Providing the contractors with accounts for the most recent 2 years as well as a website showing completed projects is the standard requirement.
Gross Development Value (GDV)
This is the end value of the property once the build is completed. Lenders will use this and work backwards to confirm what the maximum lending can be. For example, the total borrowing being no more than 65% of the GDV. For a development worth £2m the total borrowing allowed would be £1.3m. The percentage does vary slightly from lender to lender but 65% is a good measure to work with.
Cost of Works
Most lenders will cover 100% (or near enough) of the build costs. The land should have a value if owned already, or, if purchasing a plot this is where the client will pay their portion. This is because lenders like to see the client’s money go in first so that they are not taking all the risk. In theory, if you own a property where land can be carved off and built on, then no actual cash needs to go into the deal. If you want the development lender to contribute towards the purchase of the plot, then the absolute maximum is 75% of the land value.
This is probably the most significant point for lenders. Without planning you will be looking at shorter-term borrowing as well as likely having your lending capped to a maximum of 50% LTV, not GDV, of the current value. The planning needs to be relevant to the application i.e. to build what has been approved and to do so within the required timescales set out by the council.
Always build a small contingency into the costs. If, as the client, you don’t factor this in, the lenders usually will, therefore the amount you will be able to borrow may be reduced. An amount of 5% is usually sufficient.
The standard arrangement fee is 2% of the loan amount. Most lenders will also charge an exit fee of between 1 and 2% of the loan amount, although some will still charge this against the GDV. It then follows that this can then make things very costly. The other significant costs are valuation fees, which vary depending on the surveyor. This is due to the fact that they will carry out a full development appraisal, usually of around 50 pages of information. A standard mortgage valuation can occasionally amount to a couple of thousand. The final cost to consider is a quantity/monitoring surveyor. They are likely to charge a fee for each visit; lenders may insist on a minimum number of visits or tie this cost in with their staged payments.
Borrowing under £500k is a limited market because development lenders like to make a certain percentage on each deal. Most high-volume, mainstream lenders are looking for borrowings of between £500k and £1.5m.
Contact Us About Your Development Finance Plans
Should you have any questions regarding Development Finance or a potential project you would like to discuss then please Contact Us today. You can give the team at Hawke a call on the office number 0208 660 8613. Alternatively, please do one of our development team email@example.com or firstname.lastname@example.org and they will be happy to discuss your case with you.