Development finance is an important step in the process of regenerating an existing building or starting fresh and building something new. Whether the development is designed to be sold for profit, kept to create steady income or it’s being built for the developer to live in, the right funding needs to be in place.
Quite often, a developer may be short on the required funds to complete the project, and this is where development financing comes into play. What is development finance, though, and what can it be used for?
What is development finance?
Development finance is a specialised type of loan that provides developers and housing associations with the necessary funding to get their projects off the ground and complete construction.
This type of financial support ensures that every step of a construction process has the proper funding to deal with any setbacks, delays and fluctuations in price for materials. As a result, a developer’s ideas, dreams and plans can come to fruition.
With this backing, developers can completely focus on the project at hand rather than worrying about funds and how to raise money to pay for certain aspects of the build. This can help to accelerate a timeline and mitigate any financial risks, as everything is in place and covered by the development finance agreement.
What type of projects can development finance be used for?
As the name suggests, development finance can only be used for financing developments. The funding must be specifically for the property development costs applied for, which includes land or property acquisition, the cost of labour and materials.
A developer can obtain development finance for several types of properties, including:
- Residential property development
- Commercial property development
- New builds
- Single-unit developments scaling up to large multi-unit schemes
Typically, a development finance loan requires standard construction methods, such as brick and block or steel and timber frames. However, alternative methods (like Modern Methods of Construction (MMC)) can be considered by some lenders.
How does development finance work?
Development finance is different from standard commercial or residential mortgages, where a loan is given to buy a property. Development finance funding takes into account the cost of the development – whether it’s a new build or regeneration project – as well as the projected future value of the property.
On a development loan, the interest that’s charged by the lender is added to the loan balance instead of being paid as a monthly instalment. This ensures there is no consistent drain on cash flow during construction. The total interest charged is paid when the property is sold or refinanced to repay the debt.
In terms of the amount of funding that can be obtained, developers can borrow from as little as £200,000 up to £50 million.
The application process
The time taken for an application to be approved depends on several different factors. This includes the value of the property, timescale and total development costs, the expected end value, any previous experience of the developer and an exit strategy for repayment.
Then, if all documents are correct, a valuation can be carried out with a clear process set in place.
So, what are the steps in the development finance process?
- An initial enquiry is submitted to lenders
- The lender provides an agreement in principle
- Due diligence is conducted, potentially including a site visit and valuations
- A projected future value is delivered
- A formal loan offer is made by the lender
- Exchange of contracts with signatures from all parties
- Completion of finance agreement with first set of funds released to acquire land or start construction
- Further funding to support building work and other costs
- The loan is repaid when the development is sold or refinanced
Is development finance right for you?
If you’re a developer and have a building project in mind, a development finance agreement could be just what you need to get it off the ground.
There are many services and financial institutions available to speak to, like ABC+ Warranty, who can provide more answers.