100% Development Finance Is Available
In our blog a few weeks ago, we talked about raising mezzanine finance for property developers – if you want to find out more go to our blog for the 2nd October 2017.
However, there are also occasions when developers need to raise 100% funding because don’t have any cash to put into a deal at all. There can be various reasons for this, but one common reason is developers often have more than one project running at any one time, with the result that they have no cash available to inject into a new project when it comes along.
Therefore, they often miss out on great opportunities.
There are a couple of options that developers can consider should this scenario arise.
Option 1 – offer additional security
Option one is that a developer offers additional security. What I mean by this, is offering another property they already own – it can be an investment property, a completed development that hasn’t yet sold or they can even use the equity available in their own main residence.
Normally what happens is that the lender providing the main development loan takes a first charge over the main security which is of course the new development that is being undertaken.
Then in addition, the lender takes a charge over the property being offered as additional security. This can be a first charge if the property in question is unencumbered and has no mortgage outstanding.
Alternatively, if the property being offered as additional security already has an existing first mortgage, then the development lender can take a second charge behind the first mortgagee, providing of course there is sufficient equity.
To give you an example, I had a client a couple of months ago who had a new development opportunity, but had no cash available as it was all tied up in his current project which was not yet finished.
However, although he had a mortgage on his main residence he had considerable equity.
So, we put the application together and applied for 100% funding to cover the purchase of the new site, together with all the development costs as well as professional fees and roll-up of interest during the 12-month period of the project.
In presenting the deal to a lender, we structured the funding based on a first legal charge over the new development site and a second legal charge over the freehold of the client’s main residence.
This meant we could raise 100% funding which enabled our client to proceed with his new project.
Option 2 – approach a specialist lender who will lend 100% funding for an equity stake in the project
The alternative route is to go to a lender who will offer 100% development finance without the need for additional security. Instead they will take an equity stake in the development project.
This type of lender will fund 100% of all project costs including the purchase price of the development site, all the build costs for the project and all the professional fees and interest costs.
The advantage of this option is not only does the developer not need to inject any cash, but nor does he need to offer any additional security.
However, because the lender is putting in all the project costs, then it becomes an equity lending situation, which means the lender will require a profit share from the project.
The amount of the profit share required by the lender varies, but is typically around 40% of the net profit from the deal.
This type of funding is only available through specialist lenders and is viewed as higher risk lending. As a result, the lender usually applies some important parameters such as:
- Location – this is a crucial consideration
- The type of development – new build is often preferred to conversions
- The developer needs to be experienced
- Usually the developer is required to employ a contractor on a JCT basis
- Minimum profit returns that are required – usually around 25% of the GDV (Gross Development Value)
- Deal size is also important – deals with a GDV below £3 million are unlikely to be considered
This type of funding is very specialist in nature and needs to be considered carefully. Consequently, it is not for everyone.
However, it is a very attractive and viable option for experienced developers who want 100% funding.
In summary, developers often think that because they don’t have any cash, they can’t go ahead with a project. But that does not need to be the case.
100% funding for development projects is available and if you’d like to find out more, give us a call on 020 8949 2122.