For borrowers looking to apply for development finance funding for building projects, being prepared prior to making the application will save a lot of time and hassle.
There are various factors that will need to be taken into account to ensure that a development loan is the right path for you. Planning beforehand is key to success so getting together the correct and necessary information is essential in order for lenders to take you seriously. Having good knowledge of the lending criteria you will need to stick to is a great place to start.
What is the Criteria for Development Finance?
It is vital that you consider how lenders approach applications for development loans in order to maximise your chances of being approved. Each application will be looked at in an individual case by case basis, however it would be wise to consider the following key points:
The Loan Period
A development loan is a short term funding solution with a typical term of 6 to 18 months. Some lenders will offer more flexibility, but generally it is expected that the loan will be repaid between 12 and 18 months with no early repayment penalties due should the loan be paid off early.
Loan to Value
The LTV will typically be offered at a maximum of 55% of the gross development value (GDV) although some lenders may be more flexible and allow for a higher percentage of the GDV. This will determine the actual amount that the lender is willing to give as a loan.
Previous Experience in Development Projects
Your experience in development projects will go a long way in increasing your chances of successful approval by lenders. If the lender can see you have the knowledge and skills to bring the project to completion you will be considered less of a risk and therefore are more likely to be approved and often at reduced interest rates when compared to first time developers.
This is the collateral that you will offer the lender as security against the loan and must be of sufficient value in order to be approved.
The location of the development project is vital to the lender in order to reassure them that once the build has been completed that the chances of selling or renting are realistic and will be as profitable as expected.
Is the Project Viable?
In order to be approved, the viability of the project must be clearly shown to the lender. It is of paramount importance that the developer is realistic and have the ability to prove the potential success, because if there are too many concerns the development loan application will more than likely be rejected.
What Information Will You Need to Provide to the Lender?
A lender will require certain information from you when they are considering your development finance application, including the following:
- Site and/or building information such as the valuation and location.
- The expected cost of the entire development taking into account all additional fees that may arise.
- The appraisal of the development project.
- The necessary planning permission is of vital importance for a lender to take you seriously so if you already have this in place you will be proceeding from a stronger stance.
- Gross development values are vital with the evidence of how they have been calculated.
- Applicants details will be required and for limited companies details of all directors must be provided. This information should include all previous development experience, outcomes, CV’s and profits.
- Contractor and builder information detailing their previous experience.
- Project manager details, again including previous development experience.
- The structure of the company.
- Asset and liability statement for applicants and directors.
Required paper work will include the following:
- A detailed and realistic breakdown of all the costs that will be involved in the development.
- Project designs.
- Planning permission – full details of all applications approved or awaiting approval
- Development schedule detailing how long the project will take to complete.
- Professional details e.g. contractors, builder, legal representation etc
- Previous experience in details including profits made.
- An up to date ALIE (asset, liability, income and expenditure summary).
- A valid exit strategy which will clearly identify the way in which the loan will be repaid.