The development finance landscape is constantly evolving, with new lenders entering the market on a regular basis. While some developers choose to work directly with development lenders, many developers work with their development finance broker in order to ensure that they receive the best possible finance.
What is development finance?
Development finance is a specialist type of finance offered by high street banks and specialist lenders alike. Generally high street banks will offer the lowest rates but will also have the most stringent lending criteria. The result of this is that experienced developers, with strong projects are likely be offered a very attractive facility by a high street bank. First time developers or speculative projects, however, are unlikely to be offered funds from a high street bank and will likely need to approach a specialist lender. Development finance can be structured in a number of ways but, most commonly, it is made up of multiple tranches. The first tranche is the land loan and is released by the lender in order to assist with the purchase of the property. While some lenders will go higher, generally the land loan will be between 50% and 75% of the value of the property. Once the land loan has been released and the property has been purchased, the lender will release a second tranche to start the construction of the project. This can also be structured in a way that the borrower funds the construction, and the lender reimburses them at regular stages throughout the construction of the property. Regardless of the way in which the staged release is structured, it is likely that the lender will make use of a monitoring surveyor. The monitoring surveyor will visit the development site at regular stages throughout the construction process in order to confirm if the projects is being completed as per the construction program, once the MS has confirmed this, the lender will be in a position to release the funds. Upon completion of the development, the developer will repay the lender in one of a few ways. Firstly, the developer can repay the lender in cash generated from other projects or savings, although this is uncommon. Secondly, the developer can repay the lender through the proceeds of sale from the project. Finally, if the developer intends to retain and rent out the property, they can do this and refinance the development finance facility onto a longer-term mortgage.
What is a development finance broker?
A development finance broker is a financial intermediary, offering their clients access to the best development finance facilities. As previously mentioned, there are hundreds, if not thousands of development finance products on the market, each with their own application processes and lending criteria. With this in mind it is close to impossible for a property developer to scour the market for the best available facility. Brokers, on the other hand, stay up to date on lenders and their products, making them a valuable resource. Moreover, development finance brokers are also able to leverage their years of experience in order to ensure that their clients are fully informed throughout the application process, giving them the highest possible chance of a successful application. Finally, brokers are also skilful negotiators, making them useful throughout the application process. By leveraging on the negotiation skills, brokers can ensure that the loan application is fast and efficient.
When to use a development finance broker?
Using a development finance broker can often be the difference between a successful and an unsuccessful development finance application. While development finance brokers provide a useful service to clients who wish to compare rates from a number of different lender, there are some occasions when it may be more prudent to approach your bank directly. Perhaps the best example of this is where a developer has had a long-term relationship with their personal bank, who has financed a number of different projects of theirs and with whom they have a good relationship. In this case, developers may choose to approach their lender directly, as they are likely to offer the most attractive package, and the value of an ongoing relationship with a bank cannot be overlooked. On the other hand, for developers looking to compare different options from different lenders, it is very useful to make use of development finance broker. Development finance brokers can generate a number of different options from a number of different lender, giving their clients access to the “whole of market”.
In conclusion, there are a number different ways in which development finance brokers can assist their clients, but perhaps the most valuable is by giving them access to a wider network of development finance products. This is especially useful for property developers who are busy with other projects and developments, using a broker can free them up to focus on their core activities.