Development exit finance is a form of bridging finance, the difference being that exit finance is aimed specifically at property developers.
When is exit finance used?
Development exit finance is used by developers who have finished off a project, but the completed property has not yet been sold.
However, rather than wait for the sale of their current project, they want to be able to move onto their next project.
Exit finance enables the developer to do exactly that. The exit finance repays the lender who funded the development, and because the exit finance is typically for 12 months it gives the developer additional time to sell the completed project without having to drastically reduce the sales prices.
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How does development exit finance work?
Using an example, let’s say you, as the developer, have just finished a development of a block of ten flats. You managed to sell three off-plan, leaving seven remaining to be sold.
However, because the lender who provided the property development finance did so for an 18-month term which is about to expire, you as the developer are beginning to feel under pressure.
The development finance is coming to the end of its term and you still have 7 flats to sell. Of course, you don’t want to have to lower the prices of the flats as that will affect your profit. Consequently, you need a bit more time to sell the remaining flats.
The option you have in this situation, is to take out development exit finance on the completed project.
The benefits of exit finance
- The lender gets repaid when the term on the development funding expires.
- The interest rate on exit finance is usually cheaper than the interest rate on the development funding.
- The exit finance is for 12 months.
- This gives you as the developer the time you need to sell your completed project at the best possible price.
- As a result, you maximise your profit.
What is ‘practical completion’?
One important condition for a project to qualify for exit finance, is it must have reached what is called ‘practical completion’.
Practical completion is generally considered to be the point at which the building project is complete in accordance with the building contract and the developed property is fit for occupation.
A lender providing property development exit finance will require Building Control (from your local authority) to confirm the project has been completed to a satisfactory standard at which point a certificate of practical completion will be issued.
In addition, the lender will require what are called ‘build warranties’ to be in place. This is a requirement, particularly on new build projects and is often provided by an organisation such as NHBC.
Just remember, before you are able to draw down on an exit finance facility, you will need to make sure you have both practical completion and a build warranty in place.
If you would like to find out more about how property development exit finance can help you, please give one of our team a call to discuss your requirements.
