Hari Patel, Senior Associate, Structured Finance, answers some of the commonly asked questions Sirius Property Finance receives from those new to real estate development with regards to their development finance application.
How much development finance can I borrow?
The loan amount is based on a percentage of the gross development value (GDV) at the end of the work, typically up to 65% LTGDV, although this can be increased depending on the project.
However, a refurbishment loan is likely to be a more suitable option if seeking a smaller amount to borrow.
Loans are typically structured to ensure that the developer’s contribution is utilised up front, with the lender providing the majority, if not all, of the build costs. It is usual for funds to be drawn down in stages against architect’s or quantity surveyor’s certificates.
Projected gross property development values will influence loan to project costs, but funding is available on occasions of up to 90% of the purchase price and build costs.
It is often possible to organise a loan to finance up to 100% of the property development costs where the borrower already owns the land on an unencumbered basis, or can offer additional tangible security.
It is important to note that the amount you can borrow is based on the strength of your proposal, and this is where the knowledge and experience of your real estate debt advisor can make a real difference.
How long can I borrow for and when should I apply?
A property development loan is usually arranged on an interest-only basis, and the term of the loan would typically be 6 to 36 months, depending on the size and nature of the underlying project.
Sirius Property Finance negotiates finance requirements with a full panel of property development lenders and other financial institutions to provide the right ‘match’ to the project.
Development funding without full planning consent is challenging to secure unless you are highly experienced and have completed several development projects. Before seeking finance, it is essential to finalise planning consents and have all relevant documentation available to show your lender.
What rates can I expect to pay for development finance?
There are no set rates for property development finance.
That’s where Sirius Property Finance comes in. With years of experience in this field, we know what information should be included within an application and how best to present it for submission.
Sirius has access to some of the market leaders in this field and work with a panel of specialist property development lenders and other institutions to find the right match and negotiate the best rate for each proposition.
The lenders assess each application individually and price according to the strength of the development proposition and the borrower. Currently, a good benchmark for pricing starts from around 7%. Usually, the interest can be rolled up into the loan, so there are no monthly payments.
The pricing varies according to the nature of the project, and can be much lower, or higher, depending on the LTV requested, or the asset class being built.
For example, Sirius works with banks that specialise in funding prime central London developments, where pricing can be as low as 5%.
YOUR DEVELOPMENT FINANCE APPLICATION
Where to start:
Once the project has been identified and viability, costs, end value and profit margin, have been roughly worked out, contact Sirius to discuss your requirements.
It doesn’t matter if you don’t own the land/site yet – we’ll structure the acquisition finance as part of the development finance.
Sirius will present your unique development proposition with the most favourable providers and, if successful, will provide you provide you with an outline (known as indicative terms) of the rates and terms you can expect in the finance market, including a breakdown of anticipated costs and fees.
If the indicative terms are acceptable to you, Sirius will compile the proposal and submit your application to the most suitable lender.
You should be prepared to provide a full development appraisal to include the following:
- CV and evidence of previous development projects/experience
- Details of the planning consent including any restrictions, Section 106 or Community Infrastructure Levy requirements
- A full breakdown of the development costs
- Likely end value of the project (known as the Gross Development Value)
- Schedule of works and build stages
- Timetable for release of funds which ties in with the end of each stage of the build
- Asset and liability statement
- Financial accounts
- Full details of the professional team involved
- Proof of identity
- Exit strategy (e.g. sale or refinance)