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Property Development Finance Explained, development finance is a form of finance used to develop property it could be used to say refurbish a property before selling on at a later date, or for the development of new build properties from the ground up, most of this type of finance is used for the development of residential property, there are a few lenders who would lend on commercial developments, but that would be only if the developer had a suitable tenant signed up on a minimum 10 years lease.
Property Development Loans Explained
Property development finance is offered either by a financial institution such as a bank or by other lenders these can include, private banks, private investors and sometimes peer to peer lenders, one thing to consider with this type of funding is that it is offered in tranches rather than with a standard loan this is paid into your bank account on the day you draw down the loan, so in this instance you are paid just an agreed amount the first being when you actually purchase the land or site and this will be for an agreed amount at a pre-agreed to loan to value, so if for instance your site purchase was £200,000 with construction costs of £200,000 and the lender had agreed to fund you at 75% of costs, the agreed facility would be for £300,000 the way this would work would be as follows:
GDV of the site is £550,000
Site Costs £200,000
Development Costs £200,000
Agreed Development finance 75% of costs is 75% of £400,000 equal to £300,000.
The lender would work this is they would offer £200,000 as full finance for all of the development costs, with a further advance against the Land/Site purchase, they will always look to fund 100% for the construction costs to ensure you do not run out of cash during the construction phase, the balance for £100,000 would then go towards the site purchase. If you agreed a high ratio say a facility of 90% of costs then it would work as follows.
Costs £400,000, Construction £200,000 Land £200,000
90% of costs gives a loan of £360,000 this would be split as follows
Construction £200,000 being 100% of costs
The balance of £160,000 would then go towards the land purchase, this would mean a cash input from the developer of just £40,000, however in the scenario the rate of risk to a lender is higher and consequently the interest rates would be charged at a higher rate.
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