The real estate development industry can be a very lucrative business. But real estate development is not an easy task. Far from there. Developers continually face several challenges, ranging from poor weather conditions to shortages of skilled workers, long delivery times and even rising fuel prices. As a developer, these issues can disrupt planning and budgets.
Here is a basic guide to real estate development financing.
What is Development Finance?
Development financing is a short-term financial loan suitable for new and experienced developers and builders. Typically, development finance provides developers with quick access to funding and convenient repayment terms. Often, this type of financing comes with a term of 3 to 24 months. Although appraisal is important to acquiring a loan, determining the value of property varies depending on the type of loan and the unique requirements established by lenders.
For example, mortgage lenders may consider the value of a property at different stages of a project’s life cycle. In contrast, development finance may consider valuation of the property after completion, giving you considerable time to generate profits and repay your loans. Real estate development financing is a quick financial solution for developers to raise more capital, helping them finance building material costs and project professional fees.
When to consider development finance
Development finance has been around in the real estate industry for years, but it has become more popular than ever due to the uncertainties in the global real estate market presented by the Covid-19 pandemic and other political factors like Brexit in Europe. Development loans come with specific requirements. You should consider development funding if:
- You have the right papers
There is no single method for obtaining a development finance loan. Each institution has its conditions of application. Builders should only consider development finance when they have the required documentation to support their claims.
Every document, receipt and proof of ownership can improve your chances of getting your development finance loan. Essential documents to have before applying for a development finance loan include your planning permission assets, liabilities, income and expenses (ALIAE) summary. These documents allow lenders to determine the amount of security you bring on board and the extent to which you can afford unexpected costs.
- You are confident about reimbursement
Lenders provide development finance to developers who can give them significant repayment assurance. Therefore, you may have to forego this financing option if you do not meet good credit standards or cannot meet strong credit terms. Lenders require a solid exit strategy, whether the developer leases or sells the property after completion.
- You are prepared to cover fixed expenses
Be prepared to bear any unforeseen costs if you plan to fund development. Fixed expenses such as arrangement and exit fees are a mainstay of the development finance acquisition process.
Lengthen your conditions
Developers can choose to extend their development finance terms beyond the traditional 3-24 month period if the short term is likely to cause construction delays and issues. This extension is known as refinancing and can give you the option to complete your project, sell your asset, or arrange financing through traditional financing channels.
If you’re still not sure
Always consider discussing your situation with a real estate development finance broker. They know the industry and will be able to help you fully understand the circumstances, fees and what is required when completing your application.