What is development finance?
Development Finance
Property development finance is a short term loan (typically up to 18 months) used to fund property development. This can be either a new construction or a refurbishment and is mainly for residential developments.
The total amount of finance available is based on the gross development value (GDV) - i.e. what the site as a whole will be worth once the development is completed. But it will be advanced in stages as particular development milestones have been met.
This type of finance is typically used by experienced property developers working on extensive projects. Examples include converting a disused commercial building into apartments or building a new block of flats on an old car park.
Typically a lender will provide an initial advance based on the current land value, which can be used to fund the initial building phase. Once this is completed the site can be revalued, enabling further funds to be advanced. Depending on the size and type of development there could be multiple phases of funding.
The loan interest is normally rolled up and paid at the end of the development, along with the capital repayment. This can either be through a sale of the development site, as a whole or in plots, or potentially via a refinancing secured against the completed development.
In assessing an application for development finance a lender will want to see some or all of the following:
Details of the current land/property value and any loans already secured against it
Details of the development plan, including timescales and build costs
Information to support the gross development value
Evidence of the previous experience of the developers involved
Details of the professionals involved in the building project
Planning consents
Building regulations
Overall development finance is not for the DIY house builder, but can be an important source of working capital for experienced developers looking to borrow against the future value of their development.