Real Estate:  Property Development Finance FAQs

How Is A Development Loan Structured?

A development loan can be structured in many different ways but normally there are three facilities within the loan which can match the borrowers’ requirements during the construction stages. These are:

  • Land Facility (which is advanced against the purchase/refinance)
  • Build Facility (which is advanced in arrears after a progress report from a monitoring surveyor)
  • Retained Interest & Fees Facility (which services the loan and funds the arrangement fees)

What Is A Development Appraisal?

A full development appraisal normally covers all aspects of the property including legal, planning and due diligence. Most of time however, it is just a financial spreadsheet which helps property developers to calculate the NPV (net present value) of a project.

Preparing a rigorous development appraisal is crucial for every property developer before making an offer to purchase any development site.

What Do You Need To Prepare Before Applying For A Development Loan?

You will need to prepare a full pack of information in order to allow the lenders to analyse the project. At GIC Capital, we recommend that the pack includes the following:

  • Project address
  • Concept of the development
  • Development appraisal summary
  • Planning information
  • Professional team
  • Contractor background
  • Build cost breakdown (if not covered in the development appraisal)
  • Accommodation schedule including:
    • Number of units
    • Number of bedrooms
    • Price per square foot
    • Price per unit
  • Sales comparable evidence
  • Clear exit strategy

Why Is A Rigorous Development Appraisal Important?

An accurate development appraisal is crucial when considering an opportunity. It is very important to input the correct data as developers need to be comfortable with the residual value of the site and the real cost of the project.

For instance, slight variations in GDV, build cost, professional fees and interest cost can completely change the feasibility of the project and more importantly profitability.

Do You Need To Be An Experienced Developer In Order To Obtain A Development Finance?

Development finance is now available to less experienced developers or real estate professionals from the construction industry who have never undertaken a project as property developer.

Most non-bank lenders (also called challenger banks or alternative finance lenders) are very flexible and creative when it comes to providing solutions and products for market newcomers.

What Is A Development Loan Exit Strategy?

Normally it is a function of the developer’s understanding of the market dynamics and ultimately it depends on very clear concept of the developed product. The best strategies also include alternative options and back up plans.
A clear and rigorous exit strategy is very important when approaching a development lender as it is a good testament of professionalism and experience.

Short-term Loans: Bridging Finance - FAQs

Can A Bridging Loan Be Serviced Monthly?

Most borrowers prefer the interest to be retained but a bridging loan can be serviced monthly. It is generally cheaper to service a loan rather than accruing interest on the retained amount and in this case, most borrowers will receive more money in terms of day one net advance.  

How Do You Refinance A Bridging Loan?

At the moment there are a number of products on the market which would allow a bridging loan to be refinanced. It is very important that the interest rate of the new loan is lower than the original bridge. Professional finance intermediaries can add a great deal of value into the refinancing process, as they are able to provide a menu of options. 

It is important to understand, unless the borrower is very experienced, and they have a clear exit/refinance strategy in place then it would be wise to use the service of a broker.

What Is The Role Of The Broker?

An experienced broker will provide a suite of finance options and will guide their clients through the funding process.

What Is Retained Interest?

In cases when the borrower is not able to service a loan then the interest and arrangement fees can be retained by the lender. This means that the borrower will make a one-off balloon payment at redemption. In these cases, it is important for the borrower to distinguish between gross loan and net loan. The gross loan is the total loan amount including retained interest and arrangement fees which means that the borrower would normally receive the net advance at the completion of the loan.

What Is The Process Of Obtaining A Bridging Loan?

The bridging process is as follows:

  • Application form (although some lenders do not have a formal application process)
  • Formal term sheet issued and signed. A formal term sheet is document outlining the material terms and conditions of the loan agreement.
  • Instruction of a valuation and provision of cost undertaking to lender’s solicitors
  • Due diligence performed by the lender

It is very important for the borrower to choose the right solicitor and make sure they have not set unrealistic expectations in terms of the market value of the property.

How Can A Professional Broker Help A Borrower?

Brokers add value because they have a number of working relationships with lenders and can determine the best product in the market to suit a borrower’s needs. Furthermore, they are familiar with how lenders on their panel would perform their due diligence process which means that deals can be completed more efficiently and effectively. A broker would also help identify the most suitable product to meet the borrower’s needs and ensuring the borrow is getting the value for money on the chosen product.

Can You Use A Bridging Loan To Purchase A Property?

Bridging loans are very often put towards the purchase of a property to allow time for alternative funding to be arranged or to allow time for planning consent to be obtained.

Can You Refinance Your Existing Bridging Loan With A Bridging Loan?

It is not recommended to refinance a bridging loan with another bridging loan unless the latter would offer better terms with regards to the interest rate. Alternatively, you can refinance one bridge with another if value has been added to the property, which would lower the Loan to Value (LTV) to the existing loan.

In brief a bridging loan should be refinanced with another bridging loan only if the interest rate is lower if equity can be released while keeping the LTV at the same level or a combination of both. Borrowers sometimes do not understand the implications of obtaining a bridging loan or they are badly advised so they fall into financing options which are inefficient or expensive.

Who Pays For The Valuation Report?

The valuation report is instructed by the lender but it is paid for by the borrower. A valuation report is a common way of determining the value of a property through an opinion or the use of data, appraisal can be based on location, amenities, structural condition and recent sales of similar local properties.

Who Pays For The Legal Fees?

Legal costs are also covered by the borrower. Normally the borrower would put their solicitor in funds after which they would provide a formal cost undertaking to the lender’s solicitor.

Are There Any Additional Costs Apart From The Valuation And Legal Fees?

There are few other fees like CHAPS fees, registration fees, an administration fee and in some cases indemnity insurance.

What Is An Acceptance Fee?

An acceptance fee is paid in advance together with the valuation fee and the legal fee. Although this should be funded in advance by the borrower it is not considered an additional cost as the borrower receives this back on the day of the loan completion.

What Is KYC (Know Your Customer)?

This is a regulatory and mandatory requirement  worldwide in order to combat  & prevent theft, financial fraud, money laundering and terrorist financing. The main KYC goal is for debt providers to know and better understand their borrowers, and therefore manage their risks appropriately.

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