Residential Development Loan

It is no surprise that residential development finance has become an integral part of the  bridging world, but how many brokers truly understand how to transact it? If there was a school for brokers ‘Residential Development Finance’ would be at the top of the curriculum.

First, how much can be borrowed?

This will vary from lender to lender but is unlikely to exceed the lower of 80% of the total cost of the project or 65% of the gross development value (the total of the projected sales values). There are bridging loans for developers who need to borrow more and although they are are far less readily available, loans can be as high as 90% of total cost. They are only for truly experienced developers, and will involve some element of profit sharing such as a higher interest rate or an exit fee.

The primary reason why residential development finance is different is the need to gather much more detailed information to enable the lender to consider the proposal. This falls into a number of areas and outlined are those which are essential if you wish to progress an application swiftly and efficiently. You can download a Residential Development  Finance Application Form from Alternative Bridging’s web site and this is a useful first step in putting the story together –https://alternativebridging.co.uk/product/property-development-finance/

First, about the prospective borrower. A clear understanding of who it is; is it a company and, if so, who are the beneficial owners or is it a partnership or a single person and what experience does he, she or it have of property development?

Experienced borrowers

Lenders ideally look for borrowers to have successfully completed three previous transactions as developers and so a summary of these projects should be part of the presentation

If the principals do not have this experience, then what is their professional background; is it as a building contractor or sub-contractor, architect, surveyor or similar? In these professions what role have they played in residential development? The lender needs to know. Too often, there is confusion between experience as a builder or that of a developer and this needs to be clearly defined.

It is not uncommon for the developer to also act as contractor, employing the sub-contractors directly, all in one company or in a separate in-house construction company. In all circumstances the lender will wish to understand the construction procurement route and the nature of the contract. There are a number of different forms of contract, primarily JCT (Joint Contracts Tribunal) and they can include the design function which is known as Design and Build.

Find an experienced lender

There are lenders for those who are not experienced and wish to undertake their first small project, but then the gearing will be a little less generous and the pricing marginally higher. Often these small projects are for owner-occupiers, who require residential development finance to either renovate, re-develop or build their “dream home”, and as the borrower will live in the property the loan will be regulated. Only a limited number of lenders offer regulated development finance.

Risk Assessment

Turning to the property to be developed, is it previously undeveloped, a greenfield site, or is there a redundant building to be demolished, a brownfield site? If the latter, what was the previous use of the property as there may be contamination and, if so, this is a risk which will need careful professional management. For example, the redevelopment of a filling station site with a block of flats will probably require the tanks and hydrocarbons to be removed. This need not preclude a loan being forthcoming but the extra construction cost must be allowed for.

Click here to read the article in the November issue of Bridging Introducer.