Development Finance
Commercial finance, for property development purposes, is available through a number of major banks, some of which are more prominent in the market than others. This is probably due to the fact that it is perceived to be riskier business because developers sometimes mismanage a project and run out of money before it is finished. In such circumstances the bank would have to step in to rescue matters at a cost.
Someone seeking development finance might either already own a property and/or piece of land, or have identified a plot for sale to suit their purpose. This could involve the conversion of a building (e.g. a large country house into a hotel), the development of a single dwelling on a small plot, or the development of a large block of flats perhaps on a derelict site. In all of these cases, the developer would need staged funding over a limited period rather than a long term mortgage.
The bank would typically offer terms over an eighteen month period on an interest-only basis, with the interest rolling up to be repaid on completion. This could be through the sale of the property or longer term financing, perhaps through a commercial mortgage.
The lender would look favourably on a development project where it can be seen that the developer has pre-sold part or all of the building. This might typically be the case with a block of apartments, for example.
Development finance can take quite some time to arrange because the lender will have an exhaustive list of requirements to include a full set of drawings for the project and a valuation of the land or property as it presently stands with a projected valuation on completion. They will also need to see evidence of the developer’s relevant experience and a summary of his personal and business assets and liabilities, together with a financial plan to include a full costing of materials and labour and the proposed strategy for repaying the loan.
Each project would be considered on its own merits but, in general terms, lenders will advance up to 70% of the cost of the land/property plus 70% of the development costs.