Development finance loans are designed to help investors and builders secure the funding they need for a project. But what are the stages, and what can you expect at each step?
Understanding Development Finance
Development finance is a short-term loan, designed to cover both the buying of a development site and the costs of a construction project. Unlike a other types of loans, a development loan is drawn out in stages. These stages mirror the progress of the project and are usually divided into three parts:
- Land Loan: Often the first part of the loan drawn down. It is sometimes called the ‘day 1 loan amount’ and is used to purchase the land which will then be built upon.
- Build Loan: The building loan funds the building costs. This portion is usually released in stages as the project progresses. An Independent Monitoring Surveyor (IMS) is employed to keep an eye on the progress of the project and report back to the lender.
- Lender Interest and Fees: The lender then calculates interest and fees from the total loan amount.
Let’s take a closer look at the stages involved in securing and managing a development finance loan.
1. Enquiry And Advice
Before applying for a development finance loan, it is important to talk to a professional about whether this is the right type of loan for you.
Speaking to a loan provider directly will help you avoid any broker fees, and help you decide whether this type of financing is right for your project. Many bridging lenders will offer free consultations where you might be able to discuss the amount needed and any specifics.
It’s important to shop around for the right partner to ensure you are getting the right advice for your needs.
For advice and guidance around development finance loans, speak to Blue Square Capital today.
2. Application and Agreement in Principle (AIP)
Once you have chosen a lender, the next step is to submit an application.
This will normally involve a detailed proposal which outlines every stage of your project, including plans, budgets and any financial considerations. Based on this conversation, a lender might issue an Agreement in Principle (AIP).
This is a sign that the lender is willing to explore the application further, though it’s worth noting that it may be subject to further checks before being fully agreed.
3. Due Diligence
The due diligence part of the process involves the lender conducting a thorough review of your project to suss its viability. This may include:
- A Site Visit: The lender or their surveyor may want to visit the development site to gain a better insight into what the project will look like.
- Valuation: A professional valuation is then carried out. This explores the current value of the site, the estimated build costs, and the potential Gross Development Value (GDV) of the completed project. The lender can then feel confident that the project will be able to return the fees needed to repay the loan.
- Financial Checks: The lender will want to ensure you are able to repay the loan. It is important to ensure all the information is gathered ahead of the application to ensure this stage runs as smoothly as possible.
4. Loan Offer and Legal Documentation
If the lender is happy with the results of the due diligence, they will present a formal loan offer.
This will very clearly outline elements like the loan amount, interest rate, repayment schedule and any other agreed terms. When being presented with the formal loan offer, it’s important to ensure the terms are outlined clearly. Making sure it is understood by both parties helps avoid any misunderstandings.
Once you accept the offer, the next step is to finalise the legal documents. At this point, it’s important to employ a lawyer to ensure everything is in order.
5. Completion And Drawdowns
After signing the legal documents, the loan is finalised. At this point, the first stage of funds are usually released to kick off the project.
Typically, this first amount is used to cover buying the land needed for the project. However, if you already have this capital available, you might use this first payment to start employing the relevant suppliers.
The rest of the loan is released in stages based on pre-agreed milestones. These milestones are usually monitored by the Independent Monitoring Surveyor, who lets the lender know that the project is progressing as planned.
Any delays in the work may affect the payments, so these timings should be stuck to where possible.
6. Repayment and Exit Strategy
Before applying for the loan, a lender will want to know that you have a clear and reliable exit strategy.
This could involve selling the completed property, refinancing the loan, or using a bridging loan to pay off the remaining balance.
See our guide around what to consider before getting a bridging loan.
A well thought through exit strategy means that you can repay the loan as planned and avoid any financial complications.
Understanding The Stages Of Development Finance
Development finance happens in multiple stages, each with its own set of conditions.
From the initial application to the due diligence, loan offer, and drawdown stages, every step needs to be approached with careful and realistic planning.
If you need help or guidance around a development finance loan, visit Blue Square Capital today.
