Few developers start and complete a project using only their own money; as with other property purchases, most developers will place a deposit and make up the required amount with development finance. These funds can be used to purchase land or property, to complete the project, and to pay contractors or suppliers.
Unlike a residential property mortgage, in which funds are released all on the same day, development finance is typically released in stages or ‘tranches’, to be drawn down as the project progresses and facilitate cash flow throughout the life of the development.
Mortgages for property development are varied and complex, and the nature of the development finance you require depends on your project, and what you’re looking to achieve.
Senior debt: The first charge loan over a development project is referred to as senior debt development finance; in most circumstances, senior debt is the cheapest and most straightforward form of project funding.
Senior debt can be used for an array of development projects. Residential developments are often the most straightforward, and the majority of lenders will be amenable to such projects. However, senior debt can also be used for projects as varied as commercial developments, industrial developments, student accommodation blocks and more.
Stretched senior debt: Beyond senior debt, ‘stretched’ senior debt is a finance product that can extend to a higher loan to cost (LTC) or loan to value (LTV) than standard senior debt. Because of the increased exposure, this is usually only available for more experienced developers.
Stretched senior debt can be particularly useful for developers who have more than one project running concurrently. With multiple developments underway, liquidity can be limited – so senior stretched debt creates some flexibility. This can often be preferable to mezzanine finance: with stretched senior finance, a single lender can provide the entire loan – rather than doubling up on lenders, complexity, and potentially fees.
Articus Finance brokers have a deep understanding of development lender criteria, and can advise you accordingly.
The profile of a property developer varies from very experienced developers to those just beginning their journey. But in any case, Articus Finance will assist you through the whole process.
As for lenders, the development finance lender landscape has become much more varied in recent years. At Articus, we work with institutions across the market offering mortgages for property development, from high street banks to specialists. However, despite the growing choice in development lenders, this world is still best navigated with the help of an expert to ensure the best outcomes.