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Development finance for first-timers

uncategorized Jul 30, 2018

If you’re looking at getting into new builds as part of your property investment, you need to get to grips with a different kind of funding.

You can’t get buy-to-let (BTL) mortgages for a new build and bridging lenders see this as a specialised area.  However, there are lenders who do specialise in development finance.

Before I go any further, we are not talking about building your dream home a la Grand Designs.  There are mortgages for people who want to self-build, but as a property investor, you will be looking for something different.

Development finance is usually for new build projects on greenfield sites, or demolishing an existing building on a brownfield site and rebuilding, or, in some circumstances, major conversions, but only if significant structural work is required.

How easy is it to get development finance?

First you will need to jump through some hoops!

Number 1 is experience.

Development finance lenders need to be confident that you know what you’re doing.  That means you’ll need to demonstrate that you have experience on board.

A first-timer in building a new development, by definition, doesn’t have the necessary experience.  Assuring the lender that you’ll be using trusted contractors and experienced tradesmen won’t be enough.  Anyone who is not invested in the project can quit at any point.

If you have no experience it may still be possible to obtain development finance but from a significantly smaller pool of lenders.  Your choice of project matters here, make it too ambitious and lenders will walk away, so go for something more modest i.e. a single unit new build, to cut your teeth on.

The only way to get a wider choice of lenders willing to lend to you and satisfy your lender that you have access to the necessary expertise is to form a Limited company, just for the project (known as a special purpose vehicle – SPV) where at least one of the shareholders has the necessary experience.  This means bringing in a partner and sharing the profits of the venture, as well as the risk.

The second hoop is cash.

Your lender will expect you to have sufficient funds to purchase the land, original property for demolition or building for restructure.  It’s rare for them to lend against anything but the building cost.  Even if they are willing to lend 100% of the build costs, they expect the borrower to put their own cash into the project.

You may decide to bring the landowner into your SPV to mitigate the costs up front – but that will also impact on your profit share.

How are the funds released?

Mostly the funds are staged and released in arrears, so you will need enough in the bank to get started and at least do the ground works.

The lender’s quantity surveyor would then carry out a site inspection and release the first tranche of funds if they’re happy that the work meets required specifications.

This process is repeated with the lender’s QS inspecting at agreed stages and only releasing the funds that cover that work once they are satisfied that everything is on track and up to spec.

This is a commercial facility for commercial borrowers and not for novices – but if you have already built your property investment up and want to try your hand at a new development it’s a possible route.

Take the advice of your expert partners and keep your eyes open so you can spot issues before they become a problem and you’ll deliver a successful project.

 

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