To fund or not to fund
If you have already broken ground and started your development without funding you may find yourself in a situation where funding may be required because you changed your specification or you have been offered another scheme at a compelling price and you cant afford to do both from cashflow. If the latter has occurred it may be easier and quicker to get funding for your existing scheme and use the funds set aside for the new scheme, or you could be funded for both schemes.
When you have already started a project without funding, you have already invested significantly in the scheme by completing a full planning application, buying the land or entering into a JV with the vendor, clearing the site etc. These factors usually appear in a development funding application with considerable costs, so a lender looking at this is far more inclined to fund the rest of the development 100% without eye gouging interest and arrangement fee costs as the risk is lower as will be the loan to GDV depending on the numbers.
Consider bridging finance for partially completed sites or building conversions
In some cases, where the developer is purchasing an existing building with utilities supply in existence and full planning using permitted development rights, it can be hugely beneficial from a finance perspective to buy the land / building, then use a development bridge loan to fund the build out. As the development progresses and the property value increases, you can then re-bridge to release additional funds to continue the development and repeat until the scheme is finished. Development bridge funding can be significantly lower in rate and arrangement fees as the lenders risk is based on an asset with an existing value not a parcel of land with a plan to build an asset.
Its also possible to buy an existing building with funding and then use a development bridge, but you need to bear in mind that the bridge lender will require first charge on the property and therefore the amount they lend will need to refinance the initial lender first before additional funds are released to the developer. If you have been able to buy the building and add value you may be in a position to benefit from this, depending on the amount of value added obviously.
Funding your existing Scheme is not going to plan
The difficulty in funding an ongoing land parcel development can occur when there is an existing lender already in play. Any new lender will not want to take on another lenders problem, so if the issue is that the agreed draw downs are not financing the scheme adequately and the current lender is reluctant to extend the facility – then there has been a miscalculation in the cashflow forecast. Additional funding will affect the loan to GDV percentage which all lenders use to gauge appetite to fund a development. If you’re in this position you should be meeting with your lender to understand what’s gone wrong and a plan to resolve it, because the lender doesn’t want the scheme to fail either.
Refinance on better terms
However as the build out progresses a new lender is literally looking at a more solid proposition. When you have progressed to wind and water tight stage a lender will assess the scheme based on market value as the development now stands. Compare this to the market value of land with full planning and you get 2 distinct different numbers. At this stage the lender could refinance the scheme, pay out the existing lender and provide additional funding to help the developer complete the job. The lender is not looking to take on a problem here, just simply refinance on better terms leveraging an asset for security.
The closer the build to completion the higher the market value. So if you are in a position where you know a scheme will run out of funds before the end you should plan to get the properties built to the most advanced stage as possible and engage with a lender to discuss the refinance plan and seamlessly overlap that plan with the scheme so you don’t have your team walking off site while a refinance exercise is completed. A lender will be more receptive to this approach as opposed to an application from a developer that is in difficulty and could be at risk of losing key workers.
At Specialist Property Finance we help developers through the lending minefield and funding during a build out can be one of the most challenging, so its always better to engage as early as possible.
In the next series I will be covering the subject of funding a development at the end of the build.