Bridging Finance 2

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What is bridging finance?

Bridging Finance is a general term that refers to short term finance where you can borrow for a shorter period (usually 12 months) to purchase, refurbish or release equity from a property.

Bridging Finance offers our investors and developers the flexibility to react to opportunities as they arise.  Whether you are looking to purchase a property for refurbishment, need time to sell after completing a development or have agreed to purchase a property at an auction; we can help find the right funding for you.

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Refurbishment

Are you looking to purchase a property, add value through a refurbishment and then sell or retain for rental? Is the property not currently mortgageable or requires planning permission to convert to an alternate use? Lenders in the short-term finance market have created products which work with and for you in completing your projects and/or building your portfolio.

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Development Exit

Development Exit finance, also known as a ‘marketing bridge’ is often used by clients who are approaching the completion of a project and need time to sell. It’s not always possible or can be costly to extend your development finance and a short-term-loan, at a lower cost, may be the solution.

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Auction Finance

If you are buying a property at auction, you will have 28 days to pay the remaining balance and complete your purchase. Short-term finance is often used as, by its nature, it ‘bridges’ the gap between purchase and securing longer term finance. It can be used to purchase residential, semi-commercial and commercial property and also land.

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Bridging Finance Q&As

How much can you borrow and how much will it cost?

Our panel of property development lenders tend to start with a minimum loan size of £250,000 and there really isn’t a maximum limit on how much can be borrowed.  If you are looking for less than £250,000 a bridging refurbishment loan may be more appropriate.

The loan is calculated as a percentage of the Gross Development Value (GDV) at the end of the work and this is generally up to 65% loan to GDV and a maximum of 80% of the total costs (including land and build costs).

The cost will very much depend on your experience, the size of the project and the overall costs.  Most lenders will expect your contribution to be accounted for first, through the purchase of the land (or land you already own) and their loan will then cover the remaining balance on the purchase and up to 100% of the costs (often achievable if you already own the land), however how the finance is structured will vary from lender to lender.

How long can you borrow for?

Property development finance loans are designed as a short-term facility to fund the building of a development project. Most development finance is offered up to a maximum of 24 months, but it can be longer if the scheme size and nature demand it. Be realistic when considering the length of time it will take and make sure that you factor in any potential for overruns.

There are alternative finance options to allow for more time to sell the units once the project is complete, but you should plan for this from the outset.

What experience do you need?

We have lenders on our panel that will look to fund projects from experienced developers and also those looking to develop for the first time.

If this is not your first development, lenders will want to understand what experience you have and this can be evidenced by the projects that you have completed previously.

Any lack of experience can often be supported by having the right professional team around you and a strong exit strategy in place which will either be refinance onto longer term finance or sale.

What fees will you have to pay?

Arrangement fee: Also referred to as a facility fee is charged by the lender for arranging the loan and is typically between 1-2% of the loan amount

Exit fee: The exit fee is charged when repaying the loan, but it is not charged by all lenders. Those that do charge a fee will typically charge 1-2% of either the loan amount or the Gross Development Value (GDV).  This can make a big difference to the overall cost.

Valuation fees: The lender will instruct an initial valuation on the Development. This will be a detailed report to ensure that the estimated costs of work are realistic and that any risks to the lender and the project are considered.  The cost of this report varies between lenders.  Quite often the Lender will instruct a Monitoring Surveyor to visit the project before any release of funds, to ensure that the build is progressing as planned and to the agreed standard.  This will be at your cost.

Interest: In most cases, interest is only charged on the funds released and is ‘rolled up’ (added to the amount that you owe) which means that you do not have to make payments each month. The amount you borrow increases as the funds are released and so does the amount of interest you pay.

Draw down fees: This is not charged by all lenders, but some will charge a fee as funds are due to be released.  This covers the administrative costs of releasing the funds.

legal fees: You are obliged to cover all legal costs associated with the loan, including those for the lender themselves.  The cost of this varies from lender to lender.

Professional fees: It’s important to factor in the cost of using the services of professionals throughout the course of your project. This might include Architects, Quantity Surveyors, Contractors etc. Most lenders will allow you to add these fees to your costs when calculating your loan.

Preparing to apply for Property Development Finance

It’s always good to be prepared and applying for development finance is no different.

  • If you’re purchasing land, it’s important to ensure that you carry out the necessary due diligence and that it has the correct planning permission in place for your planned build. Finance is available to purchase the land before planning is obtained, if necessary.
  • Lenders will expect you to provide a detailed breakdown of costs.  These should include the cost of purchase, professional fees (legal, planning, architect and QS and building control etc.), build costs and a contingency to cover cost overruns.
  • Most development finance is funded in stages (or draw downs) where funds are released along an agreed timeline throughout the build. You will need to think about the stages in advance and when you will need funds to be released to move to the next stage.  This will then be agreed with the lender to help the build run smoothly and ensure that you have the funds available when you need them.
  • If you have completed Development projects previously, it’s helpful to prepare a CV to accompany your portfolio.  It should include details of any planning obtained, a breakdown of the costs, any professional services used and managed and evidence of the finished project.  If this is your first development, a CV from your contractor and other professional services will be essential.
  • Prepare an Asset and Liability statement and financial accounts (if available).  This will help the lender understand your financial position.
  • If, as part of your own due diligence, you have approached local agents for their opinion on value and demand for sale, it’s always helpful to include this in your plans, as local knowledge always helps.
  • Always have a good understanding of how you will exit the development finance once the project is complete.  If you intend to keep the property, we can help obtain an indication of the funding available and if you intend to sell, evidence of your research on demand for sale will give some initial reassurance.

Understanding the Development Finance process

We have years of experience in helping our clients apply to finance their property development projects and we will guide you through the process. This will always start with a conversation with one of our consultants:-

  • Initial enquiry – understanding you and your plans.  We will ask you to provide as much information about your project, estimated costs and business plan as possible before approaching lenders.
  • Research the market and provide indicative terms.
  • Site visit with prospective lenders.  Our lenders like to meet you on site to assess the project’s viability and this is where your relationship with the lender begins.
  • Formal loan offer issued, once the lender’s credit team has reviewed all information.  This will include the terms on which they are prepared to offer, subject to valuation.
  • Valuation of the land and planned project. This will include a valuation of the existing site, review of predicted build costs, expected Gross Development value (GDV) and commentary on the exit strategy once complete.
  • Legal process. Once the offer is signed, you will need to appoint a Solicitor to represent you and the Lender will have separate representation. It is important that you choose a Solicitor with experience in dealing with the lending process.
  • Completion of the loan.  The first payment is paid on completion, followed by further draw downs at agreed stages throughout the build.
  • Repayment of the loan

Repaying Development Finance

It’s important to plan for the repayment of your property development finance loan before you even approach lenders to fund the project.  This is for your benefit as much as the lender’s, as you will need to ensure that you can complete and repay within the agreed timescale. Your ‘exit strategy’ will depend on your plans for the project once complete and may include:-

  • Sale of the property to raise the funds to repay the loan.  You will have an understanding of the demand and value and the Valuer will also give their opinion.
  • Refinancing the property onto a Development Finance Exit product (or marketing bridge)
  • Refinancing the property onto a longer term loan in order to retain it for investment purposes.  The Valuer will also give their opinion on the demand for rental.

Development Exit Finance

Property Development Exit finance, also known as a ‘marketing bridge’ is often used by clients who are approaching the completion of a project and need time to sell. It’s not always possible or can be costly to extend your development finance and a short-term-loan, at a lower cost, may be the solution.

Can you fund a Development that is part way through the build?

Yes, there are products available that will allow you to complete a development project part way through the build.  This is sometimes referred to as ‘finish and exit’ as the product does just that!

The Finish & Exit is designed for projects which are part-complete. It may be that you have run out of funds from the existing facility and so there are insufficient funds to complete the project or you may have been relying on sales that have taken longer than anticipated and require the funds to move to the next stage.

How Bridging Loans work

Bridging lenders are different to longer term mortgage lenders in that they will usually hold interest rather than expect you to service the loan on a monthly basis and this is deducted at the start of the loan.

Interest is charged on a monthly basis with rates ranging from 0.60% to 1.5% pcm.

Example

Property purchase at auction         £100,000
3 month refurbishment                      £10,000

Then sell for £150,000 so we are asking for a 6 month loan

Loan – 75% of purchase price                                              £75,000 Less

Lenders arrangement fee (typically 2%)         £1,500

6 months retained interest (at say 0.8            £3,600

Lenders legal costs                                               £750

£5,850

Net Loan received                                                                 £69,150

In this example, you would need to show £31,000 to meet the purchase (not £25,000) plus the refurbishment costs in full to satisfy the lender.

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