Development Finance Market-Different types of finance available & the requirements of lenders!
There are perhaps 60 or more lenders funding development schemes across the UK. It is important to select the right lender for your circumstances so that the funding is matched as closely as possible to your needs. The experienced team at Yorkshire Development Finance have access to an extensive database of the lenders operating in the UK, which enables us to select the most appropriate funding for your needs.
Whilst there is no straightforward way to segment the market, here at Yorkshire Development Finance we have attempted to do so on the following basis;
- Prime Lenders-
These typically lend at the lowest rates – from c. 3.4%- 6% per annum (all in), with fees for facility set up (typical 1.5%) plus valuation and legal fees. There may also be an exit fee of 1.5% on the debt outstanding. They generally require that you have experience of completing similar schemes before as a developer (not just as a contractor), and that you have 40% of the schemes total costs available from your own resources (although may allow a gain in value of the land from successful planning permission) as part of this “contribution”. The maximum lend is also governed by the loan to Gross Development Value (GDV) ratio – usually a maximum of 50% of GDV is permitted. Once the build is underway, the lenders will monitor the scheme either themselves, or use a professional surveyor or QS which you will have to pay for.
2. Secondary (specialist) Lenders-
Typically funding schemes with debt requirement from c. £400,000, so they are not looking to fund the smallest of schemes. Rates vary from 6%-9% per annum, plus set up fees typically 1.5% plus valuation, legal and scheme monitoring fees. They also charge a fee when the debt is repaid – an “exit fee” which is typically 1.5% of the loan amount or perhaps 0.75% of GDV. These lenders will fund less experienced developers, although generally you will be expected to have had some experience in the sector as a builder, contractor or professional. They will also fund more of the costs of any given scheme than the prime lenders – sometimes up to 90% of costs. However, their prime requirement is that the lend is no more than 65% of GDV – and that includes allowance for the accrual/roll up of interest costs.
3. Tertiary Lenders-
This is pretty much every other lender in the market, and constitutes around 70% of the market place of available lenders. There is a massive range of specialisms and niches. Whilst experience in the sector is preferred, a case can usually be made for any credible individual, even if they have no experience. Obviously, common sense comes into play here – someone attempting their first scheme will be expected to start with something reasonably modest. Most lenders will fund up to 65% of GDV (including allowance for interest roll up) but some will go to 70% or even more. They would generally like you to put some funds of your own into the scheme, but it is possible to get near 100% funding for the right scheme, and there are some lenders who enter into partnerships and provide 100% funding. Rates are usually quoted on a monthly basis – say in a range from 0.8%-1.5% per month. Set up fees are typically 2% plus valuation and legal, with an exit fee of either one months interest or say 0.75% of GDV. These rates may appear expensive but you have to keep in mind that they are effectively partnering with you and likely taking a fair degree of risk. If the scheme is still going to make a decent profit for you then you shouldn’t be put off by these rates.
4. Mezzanine Finance-
These specialist lenders provide a ”strip” of funding to supplement what you are putting into the scheme. They generally allow an experienced developer who doesn’t have sufficient funds of their own to source funds from a prime funder at lower rates. The mezzanine funder will charge c. 2% per month on their money and take a 2nd charge over the site being developed.
If you are considering any of the above schemes, then please call the friendly team at Yorkshire Development Finance today.