Property development can provide exciting rewards but an initial idea needs to be supported by funding which is appropriate for the work involved. Understanding property development finance can help developers to consider their funding options, create suitable budgets and navigate the costs associated with buying, renovating or building a property.
From refurbishing an existing property to converting a commercial building or constructing new homes, a financial strategy is essential to understand the likely costs, potential revenues and any risks prior to commencing work. Here we consider some key factors for developers when assessing property development finance.
Understanding Your Project’s Financial Requirements
Every property development project will have different funding requirements according to the nature of the work and its scale. A small-scale refurbishment will involve significantly lower costs than a substantial new residential development which will include land purchases, construction costs and a range of additional fees. A realistic assessment of the likely costs associated with your project will help you to determine the most suitable type and level of finance.
Consider the costs which may be incurred which could include the following:
Land or property purchase costs
Planning applications and professional fees
Construction costs and materials
Legal, valuation and surveying costs
Contingency funding for any additional costs
Marketing and sales costs if applicable
A clear breakdown of the costs will enable developers to understand the likely total costs and help lenders to determine if a proposed scheme is viable.
Exploring Suitable Funding Options
The most appropriate financing package for a developer will depend upon the size and timeframe of the project, level of security, likely exit strategy and other factors. Developers can consider commercial mortgages, bridging loans or specialist funding which typically focuses on the value at completion. Some lenders will offer commercial mortgages for particular property purchases whereas bridging loans can offer short term finance for a time sensitive purchase or refurbishment project. Specialist development finance may be suitable for longer projects based upon a phased construction schedule and the predicted value of the completed property. Each option should be compared to understand the most appropriate funding structure considering any deposit, costs and ongoing interest payments.
How to Prepare for a Finance Application
A strong finance application will provide lenders with the confidence that the property development project is viable and that they will be able to successfully recover the amount due. Prior to submitting an application to a lender, it is important to compile all of the relevant documents which will support the submission.
Take note of the following key points:
1. Come up with a sensible budget that takes into account construction costs, purchase costs (where relevant), professional fees, and contingency costs
2. Draft a sensible project schedule that provides estimated dates for completing key project milestones.
3. Provide proof of past experience to show that your planned scheme is viable.
4. Determine your exit strategy to illustrate how you will pay back the loan including whether you will pay it off through selling assets, refinancing or another alternative.
Take note of your own financial resources and any existing loans so that you know you will be able to cover any unexpected costs.nal supporting documentation including planning approval, development appraisal, survey reports, contractor quotes and personal or business financial records.
Managing Risks Throughout the Development
While a well-drafter project schedule and realistic budget can significantly reduce development costs, unforeseen events can occur throughout any development. Developers must also consider exit strategy risks at the point of repayment. It is important to develop a realistic contingency plan when compiling a budget for a development project.
Many developers can underestimate potential costs and overestimate revenues when applying for development finance. A more realistic appraisal will include a reduction in expected sale prices, increased construction costs and delays to the projected completion date. A contingency fund will help to cover any additional costs whereas regular budget reviews will enable developers to spot any financial challenges at an early stage and adjust the budget accordingly. Developers should also consider alternative exit strategies if unforeseen circumstances at the point of repayment impact the initial repayment strategy.
Making Informed Funding Decisions
When making property development finance choices, developers should evaluate borrowing costs from various lenders, taking into account set-up charges, valuation costs, legal fees, drawdown requirements, continuing interest, and any penalties for early repayment. Developers should compare the overall cost of borrowing for each suitable option as well as confirming that the terms reflect the proposed schedule for the development. Independent legal and financial advice can help to understand the risks associated with any finance contract.
For specialist development funding advice, Silver Oak Capital can be an excellent starting point for exploring your finance options and budgeting requirements according to the needs of your property development project. Any proposed finance facility will depend upon the suitability according to the lenders specific criteria.
Ultimately, it is important to combine realistic budgeting with suitable funding, experienced professional advice and skilled project management to realise the rewards of property development.
Frequently Asked Questions
1. What is property development funding?
It is the funding which is required for development projects including the construction of new properties, the conversion of an existing property or a substantial refurbishment. The finance options will depend upon the nature of the work and the requirements of the lender.
2. Who can apply for development funding?
Property developers, investors and organisations may apply for development funding depending upon the requirements of the lender. All applications are reviewed according to the likely viability of the project, experience, affordability, security and exit strategy.
3. What documents are usually required?
A property development finance application will typically include a budget, project appraisal, planning documents (if applicable), construction estimates, property valuation and financial records. All right, individual lenders, on the other hand, might ask for other documents.
4. How can developers reduce financing risks?
Regarding how the builders can decrease the financial risks, they can do so by making sure that the budgets are realistic and that there are some backup funds, if necessary, keeping to the construction schedules, and developing some 'exit' strategy to ensure that they will be able to pay back the loans.
5. Is specialist development funding suitable for every project?
No. Every development project will have different requirements according to the works involved, project size, budget, timeframe and risk profile. Developers should compare financing options and seek independent advice to identify the most suitable option for their project.
No. Every development project will have different requirements according to the works involved, project size, budget, timeframe and risk profile. Developers should compare financing options and seek independent advice to identify the most suitable option for their project.
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