Member Article

Development Finance for New Build Properties

Securing development finance loans against properties that do not exist yet can be a tricky business. With a few exceptions, almost all secured loans must be secured against tangible assets of value.

Property loans and mortgages are secured against the properties themselves, while other types of secured loans can be issued against business equipment, vehicles, and other assets of value.

This is why it can be difficult to secure funding for a new build property via conventional channels. You may own a plot of land and planning permission may have been granted, but the property itself has yet to be realised.

All of the above puts established and aspiring developers alike in a tricky position. You know your project has potential and is practically bulletproof, but you lack the security needed to take out a conventional loan or mortgage.

In which case – what are the options available for funding a ground-up project? If the value of the development/land in its current state will not cover the costs of the loan, how can you raise the money you need to fund the construction?

Option 1 – Development Finance

The first option is to apply for a specialist development finance loan. Development finance is typically issued only to experienced developers and construction companies with a provable track record; though there are occasional exceptions to the rule, where the more flexible providers are willing to back first-time developers.

With development finance, funding can be secured against the future value of a development or construction project. A surveyor is hired to conduct a detailed inspection of the development and to assess both its viability and its future value. If the future value of the development comfortably exceeds the total cost of the loan, it may be accepted as security for development finance.

You may be able to borrow anything from 70% to 90% of the funds needed to conduct the project, while the remaining 10% to 30% will be needed as a down payment.

Development finance for new builds is much easier to qualify for as a reputable and successful developer. If you can demonstrate to your lender that you are a low-risk applicant, you have a good likelihood of qualifying for new-build development finance. Issued strictly as a short-term solution, development finance is typically repaid within 6 to 24 months – usually the moment the project is complete.

Option 2 – Bridging Loans

The second option is to take out a bridging loan, which works in a slightly different way. Similarly to development finance, bridging loans are strictly short-term solutions for projects like these. The same 70% to 90% funding could be secured with bridging finance, repayable over the same 6 to 24-month period.

But where bridging finance differs from development finance is its comparatively relaxed eligibility requirements. With bridging finance, it is essential to have assets of value on hand to be used as security for the loan. Almost all bridging loans are secured against property (residential or commercial), but other assets of value (light business equipment or vehicles) may also be accepted by some applicants.

Bridging loans will not typically be issued against the estimated future value of the development, but there may be the occasional exception to the rule.

If you have sufficient assets/equity to cover the costs of the loan and can provide evidence of a workable exit strategy, you have every chance of qualifying. You do not need to have any relevant experience or a track record in property developments, in order to access bridging finance for new build construction projects.

It is even possible to qualify for a ‘subprime’ bridging loan with poor credit if the rest of your application is convincing enough.

This was posted in Bdaily's Members' News section by iCONQUER Ltd .