After two years of difficult market conditions where residential development funding was as rare as hens teeth we are now seeing the return of a number of lenders; primarily Investment Banks and Specialist Property Lenders (the major Uk and Irish Banks are stilll notably absent).  For experienced developers they are typically lending up to c. 55% of GDV; but by combining senior debt with mezzanine and JV funds we can source up to c. 70% of GDV for speculative housing and apartment projects (maximum apartments c. 20) in good locations. Mixed use schemes where the commercial element does not exceed c. 20% of GDV are acceptable providing there is demand. We may be able to procure higher gearing for pre-sold projects. For exceptional projects we may be able to source up to 100% of costs.

Development funding  for commercial projects is available to c. 55% of GDV for pre-let or pre-sold projects.

Please call us to discuss your project and funding requirement and we will tell you quickly whether we believe it is fundable.

The remainder of this text is historic but may be of interest!

A little more information on PROPERTY DEVELOPMENT FINANCE…

Most developers require maximum funding at the cheapest price and the development finance market is complex yet competitive. Demand for housing, shortage of land, planning moratoriums and a procrastinated planning process mean that development sites are in demand and lenders are keen to do business. This has attracted new lenders and highly geared but keenly priced funds to the market and is good news for the borrower. Note: the credit crunch and slowdown in the housing market has led to a withdrawal of a number of lenders from the market and a tightening of lending criteria from others. Pricing has increased. Highly geared funding is still available for the right project (location, housing type, profitability, scheme size, length…). OPTIMA May 2010  By securing maximum funding yet retaining reasonable profits, developers are able to expand at a greater pace than if they had borrowed on a more traditional basis (typically 70/30%).

Finance for the purchase of land and construction of residential or commercial property is available from the HIGH STREET BANKS, SPECIALIST PROPERTY BANKS, BRIDGING & NON-STATUS LENDERS and INVESTORS. Lending may be made to an existing TRADING COMPANY or a newly formed company set up for the particular development, known as a SPECIAL PURPOSE VEHICLE (SPV), a LIMITED LIABILITY PARTNERSHIP (LLP), a PARTNERSHIP or PRIVATE INDIVIDUAL.

For a lender to fund a development the scheme must have the appropriate PLANNING PERMISSION. Lenders will fund schemes with DETAILED planning permission, some will fund schemes to purchase a site with OUTLINE planning permission, but it will depend upon the detail. A minimum requirement would normally be a defined access and footprint. PLANNING PERMISSION will exist or be granted for one of a number of uses including: RESIDENTIAL, COMMERCIAL (RETAIL, OFFICE, INDUSTRIAL), STUDENT, KEY WORKER, SOCIAL HOUSING ETC. MIXED USE SCHEMES, encompassing residential with an element of one or more of the other uses, are commonplace particularly on brownfield schemes.

Finance for RESIDENTIAL developments is available on a SPECULATIVE BASIS, i.e. without pre- sales of property before construction starts. PRE-SALES will reduce the lenders risk and often allow for a higher loan and/or reduced pricing. Finance for MIXED USE schemes is available from lenders if repayment of all or most of the loan can be made from the RESIDENTIAL element.
Finance for COMMERCIAL developments, at high levels of gearing is generally only available from high street banks if the property is PRE-LET or PRE-SOLD, however fccf is currently researching the commercial development finance market to establish sources of more speculative/risk funding. Updates will appear in this section but also under the NEWS section of the fccf web site.

 

DEVELOPMENT APPRAISAL and CASH FLOW

The costs of a development project will be summarised in an appraisal and valuation as:

A cash flow will be required on phased/larger projects to identify peak borrowing requirement and interest costs.
See fccf web site section on VALUATIONS for further information.


A WORD ON PRICING

By its nature development funding is short term, and a lenders income from interest at the prevailing rates does not provide them with a sufficient return on capital or contribute sufficiently to the overhead of putting the deal together. For example, if a lender advances £1M at base plus 2% for a year, the interest margin earned is £20000. Therefore the bank charges lending fees on short term funding, and these and/or the interest rate will increase with risk.

SENIOR DEBT - First charge funding from a lender.

LOAN TO COST (LTC)

LTC lenders are those that advance a percentage of the total costs. Typically high street banks will lend 70/75% LTC, and will not wish to be exposed at more than 70/75% of land value on day, and at no more than 60% of GDV (GROSS DEVELOPMENT VALUE) at completion. Typical pricing will be interest at Bank Base plus 1.50% to 2%, completion fee 1% and no exit fees.

GDV FUNDERS

GDV lenders start with the re sale value of the site work backwards. An example is funding at 70% of GDV, but with no more than 70% exposure against land value at day one, and funding 100% of build costs, fees and interest. Where land has been acquired at a favourable price or has benefited from a planning gain, thus driving up profit margins, this can equate to 85/90% of costs. Typical pricing would be LIBOR/BASE plus 3 to 4%, lending fee in 1%, exit fee of 1% to 2% of DEBT/GDV.

STRETCHED SENIOR DEBT

These lenders offer more than the standard 75% LTC/70% of GDV, typically going to 90%LTC/75%GDV with exit fees being in a range of 15% to 30% of profits.

100% FUNDING STRUCTURES

May be by one lender offering WHOLE DEBT (1st charge) or by a mix of SENIOR DEBT (1st charge) and JUNIOR DEBT (2nd charge) funders.

Funding that allows an experienced developer or industry professional to borrow the full costs of a project. As the lender(s) is taking the lions share of the risk (cost overruns, falling market, rising interest rates) the lender(s) (whatever the structure) will require a significant share of the project profits, either in the form of a PROFIT SHARE (EQUITY), an INCREASED RATE OF INTEREST (MEZZANINE), or a pre agreed share of the sale proceeds (GDV).

NOTE: Most of the major 100% funders will return any EQUITY in the LAND VALUE (MV less purchase price or current debt) to the developer either as an ADVANCE ON COMPLETION and/or a drip feed by way of a PROJECT MANANGEMENT FEE throughout the construction period. This means that developers who have either purchased well, own a land bank or increased land value by planning improvements, can take their profit on the land up front if they so wish. If they wish to leave it in, then the appropriate adjustment will be made to the profit share pricing. Note: Due to the credit crunch and downturn in the housing market there are very few lenders offeing 100% funding. For exceptional projects we may be able to source 100% of costs. Call OPTIMA for details. OPTIMA MAY 2010.

MEZZANINE

A loan which carries a monthly interest rate or a fixed fee for the duration of the contract. Typically interest rates will be c.2% to 3% per month or a fixed fee of c.30/35% annualised. Some mezzanine providers will lend the entire shortfall thus facilitating100% funding, some will require the developer to put 5/10% into the deal. Some will take additional security in lieu of the 5/10%. Security is normally by second charge, and a second debenture. Some Mezzanine funders require a PG, others don’t.
MEZZANINE can be a viable alternative to a JV/EQUITY STRUCTURE on shorter term profitable projects. Note: with the credit crunch and downturn in the housing market most mezzanine funders withdrew. However in recent months we have seen the return of a number who are actively seeking to fund viable and well located projects. OPTIMA May 2010

UNDERWRITING HIGHLY GEARED / 100% FUNDING

Lenders who offer highly geared funding are diligent and cautious with whom they do business and as there is demand for their funding they can be choosey. Here are some typical pre requisites, and although they are not written in tablets of stone they are indicative: