Development finance – A quick guide

With banks and traditional lenders becoming harder to secure property finance through, investors and borrowers have had to use specialist lenders for this type of finance. One of the biggest positives of this development is that many specialist lenders have popped up. These lenders supply specific property finance for purposes such as self-build, bridging and development finance as well as much more (source: SPF Loans).

A strong benefit of using these types of lenders though, rather than ‘across the board’ lenders is that specialised lenders offer exactly that; a more bespoke and specific service to the borrower’s exact needs.

The UK has seen huge increases in the amounts of property developments across the country and this is no coincidence as more development finance lenders have arrived on the scene, making the lending space more competitive and therefore more accessible for a whole range of investors and developers.

With more and more development finance lenders, it is important to understand what this type of finance entails, what kinds of loans it applies to and what to look out for.

What is development finance used for?

Development finance broadly speaking is used to invest in property developments of all kinds. This includes residential and commercial projects. However, this doesn’t only cover projects whereby the development is built from scratch. These types of projects also include properties like warehouses and industrial premises that need to be converted to habitable premises.

Some of these projects can cost hundreds of thousands of pounds which means that even those with sizeable monetary assets may struggle to have the funds immediately available. Development finance though covers these costs entirely and will be secured on another property or even the one in question, depending on the loan amount.

Refurbishments

A property owner may have several properties as part of their portfolio. To make a quick profit, they may seek to purchase a property, improve its status and condition and then sell it off at a profit. However, to do so, they will need the money to invest in the improvements.

For a loft conversion and property overhaul, this can be more than £100,000. Therefore, they can secure specific refurbishment finance on another property in their portfolio, refurbish the new property and then sell it off. The profits made from the sale will cover the loan cost and will also return a quick profit.

Mezzanine finance

This is a very specific type of finance that often falls under the remit of development lenders. The way in which mezzanine finance works is by combining a debt [a typical loan] with equity shares (in a business.) In practice, this usually applies to cases where there is an increased degree of risk but where there are potentially huge profits to be made. A lender will therefore lend the money needed to the borrower.

However, should the loan not be repaid in full (or the interest deferred), the lender will activate a clause in the contract where they will take a share of the borrowing company’s business and therefore profits. In such cases, the lender will make their money back through the business’ profits, selling off shares at a profit or both.