If you’ve been building your property portfolio and have an eye on doing a new build project, you need to know the ropes to ensure you finance it properly and make a good profit.
These are my top tips:
It’s different to most other property finance options and you need to understand how it works. This kind of finance is no longer available from the banks, who pulled out of it during the 2008 credit crunch. Most development finance lenders are small specialist lenders who usually only offer this kind of finance.
There are barriers to entry to deter people who are dabbling and ensure only serious investors qualify.
This is that Catch-22 situation. You need experience, but you can’t get experience without the funding to support you. The lender will expect you to have relevant experience – in other words the same level of development. For a single or double unit project, you must show that you have successfully built out a similar project previously. However, that will not be sufficient if you want to build a 10 unit project and only have experience of a single unit build.
The solution, if you don’t have that new build experience but want to get into new build, is to have a partner who already has a track record in this specific type of new build. This might be a builder or small developer, perhaps even an architect or project manager. That means that they will get part of the profits too, as detailed below.
Now you may be averse to giving away some of your profits but consider –
The structure lenders prefer is for the builder/architect/project manager to be an equity partner in the build. Their profit on the project comes from a share of the sale revenues. The common structure for this is termed a Special Purpose Vehicle (SPV); this is a limited company formed purely for the project and dissolved once the profits from the project have been distributed to the shareholders. This gives some level of protection to both parties.
Development finance lenders expect you to have skin in the game. New builds have the capacity to go awry, so lenders feel more relaxed if you are financially invested in the project i.e. if it goes bad, you hurt as well as them.
You may get 100% of the build financed, but you’ll need the money to buy the land you’ll be building on. The lender will expect you to have sufficient cash to purchase the site, or you will already own it, unencumbered. At a push they will fund up to 50%, or more if they really like the project, to assist with this part.
The five stages are typically
You will be expected to fund the first phase, up to DPC level. If you have not already maxed out borrowing on the purchase, the lender will release funds to get you to this point. At this point their surveyor (sometimes a QS) will visit the site, sign off the quality of your work and recommend the release of the next tranche of cash for you to build out to the next stage. This process of inspect, sign off, release is repeated until the build is complete.
Lenders will keep a keen eye on their exposure to site value at all times and will not deviate from their maximum loan to value (LTV). Typically this will be 55%, but can differ from lender to lender, even project to project with the same lender, but high LTV's are unlikely to be approved.
Interest is commonly 'rolled up' and settled at payback of the loan, so there are no monthly payments for you to make during the build.
Finding the right development finance requires you to know where to look. This is usually the preserve of a specialist broker who has experience in development finance.
Don’t try to go it alone, get expert advice to ensure you get the best possible deal for your project.