Property Development Finance Explained

Development finance is a specialist form of funding, that since the economic crisis has become increasingly difficult to get through the high street banks. Before the economic downturn sums were often available to developers up to 100% of the cost of their project, yet during the last few years, as banks have become much more cautious in their lending policies, there has become available a successful and expanding secondary market, consisting of many privately owned finance companies to fill this very important gap for both property developers and speculators. Whereas the high street banks tend to restrict their lending to very well established property development companies, and will lend no more than 70% of the total cost of each project, some of the small private finance companies will provide a much more positive approach.

What Are the Fees for Property Development Finance?

There are lots of lenders, many who provide various options and facilities for development loans to be structured differently. The expenses involved with applying for a development loan can be charged in a variety of different ways :

Broker Fees

Brokers charge a fee for arranging finance facilities. This could be a percentage of the loan amount or a fixed cost fee.

Exit Fees

Exit fees can be a percentage of the loan amount, however they can also be a percentage of the GDV, Gross Development Value, and not the amount being borrowed.

Facility Fee

This is also referred to as an arrangement fee or the amount in, as is charged as a percentage of the net or gross loan amount.

Interest Rate

Interest rates can be advertised and charged either on yearly or monthly basis. As a result, rates can be offered from 7% every year with one loan provider or 1% a month with another. Different lenders offer different interest rates, rates also depend on the security being offered, the amount of funding needed, how much experience the developer has and the kind of development.

These are the major fees to take into consideration. There will always be interest rates and for a lot of loans a facility fee. For the big majority of development loans there are exit fees to pay, however there are facilities where this is not applicable. Usually there are brokers’ fees, usually charged as a percentage of the loan facility as a payment to the finance broker. There are also other costs that should be taken into consideration:

TT Fee (Telegraphic Transfer Fee)

As a result of the huge sums involved, funds are typically sent from the lender’s account by telegraphic transfer. The banks charge a small fee for this service which the lender will usually pass on directly to the borrower.

Drawdown Fees

Funds are usually released in stages, as the development increases in value and this also helps to keep the interest charges to a minimum. Nevertheless, a loan provider can charge a draw down fee everytime funds are released.

Monitoring Fee

As the project progresses loan providers want to keep an eye on their investment so will usually employ a property surveyor, this might be a property survey or a quantity survey, to undertake routine inspections at the construction site. This is covered through monitoring fees which are paid by the borrower.

Administration Fees

Lenders often include some administration fees in their loan agreements.

Legal Fees

Solicitor costs for the lender and the applicant which will eventually be paid for by the applicant.

Application Fees

These are sometimes referred to as commitment fees and are charged by some lenders or brokers at the start of the application process.

Valuation Fees

The initial valuation fees can sometimes be expensive as a surveyor values the security to establish its forced sale value, open market value and also supply an estimate to the worth of the project when completed.

The Benefits of Property Development Finance

The advantages of property development financing over various other forms of lending include :

• Interest charges can be lowered by funds being released in stages
• Being much cheaper than medium and long term finance
• Rundown property can be used as security
• Income is not a problem in the underwriting and affordability calculations

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