The Advantages And Disadvantages Of Development Finance

There can be a lot of confusion surrounding development finance and what it implicates within the financial world. A question that is frequently asked is: What is the difference between development finance and commercial mortgages? And this is where the confusion often stems.

Development finance is where an individual or business is looking to develop property, or properties and have some capital but need a short term loan to help complete the development. Depending upon the lender and the circumstance, such loans normally span between 12 to 24 months. Commercial mortgages on the other hand, are usually only required once the development has been completed and additional funds are necessary. Hence, development finance and commercial mortgages do tend to overlap.

Despite the credit crunch, development finance is rapidly becoming more main stream and is a very specific type of finance. Whilst the high street lenders are active in this market, their terms may be restrictive, therefore there are a wide range of development finance specialists lending in this market. It is recommended that you seek professional advice in order to find the right deal for you.

Development finance is most popularly used in the UK for such projects as property refurbishment, property conversions and new build projects. Additionally, there are various types of development finance which undoubtedly adds to the confusion and uncertainty surrounding the term.

For example, a senior debt loan usually covers the first 70 to 80 percent of loan to value although it can be arranged against gross development value. A mezzanine Loan is a second charge loan on top of the senior debt loan, usually used to fund costs on one property while a developers financial resources are tied up elsewhere. Finally, joint venture 100 percent finance contracts you with an experienced partner who underwrites the project and shares the profits upon completion.

Property development is about having a vision; it is about understanding the market and turning that vision into a reality. However, developers often have problems getting the finance right and knowing what products are available and which lenders to use can be confusing. Finding the right form of development finance for you depends entirely upon your financial needs, whether you are a homeowner wishing to refurbish, a business looking to expand or an individual with a vision to start anew.

Funding is also available through this method for community projects which aim to provide, economic development, affordable housing and community development financial services. Therefore, development finance is determined entirely upon an individual assessment made by the lender. All aspects of the development proposal have to be faultless in the eyes of the lender before they agree to provide funding. Lenders look meticulously at development characteristics such as land purchase, ground work, labour and services, first and second fix and then sign off. In the difficult current market, lenders have to be more careful when choosing which developers to back, they are much more likely to support a developer with experience in the field than someone new to the industry.

Development finance lenders are there to build a relationship with the developer in order to share their vision and provide the support needed to make that vision a reality. No matter what particular development loan you have opted for, most can cover building costs, labour, architect, and professional costs. Property development loans will be secured against the land or the property you wish to develop. Traditional forms usually require a 20 to 30 percent deposit, whereas more recent forms are now available for debt, to release equity or mezzanines.

Loan to Value rates and interest rates vary depending upon experience and percentage of funds required for development. However, there are various client benefits to development finance, it can be raised quickly and each case is assessed on its own individual merit. Additionally, the lender will be continually on hand to support the developer with advice and help manage the development funds. No matter what you decide to do with your completed project, whether you plan to sell in order to start the next project or whether you retain the project for investment purposes, development finance is a flexible solution to suit your financial needs.