BuildStore Development Finance

Financing your Property Development Project

If you are considering a development project, the following guidance notes will help you gain a clearer understanding of the costs involved, the structure of development finance and the types of project, a lender will support.

When should I begin arranging my finance?

If you own the land outright and want to discuss your project, don't hesitate to contact us. If you have identified a project you would like to explore and you have a good idea of the likely purchase costs, build costs and its end value - it's time to make contact.

Assessing the Profit Potential of your Project

Once you understand and have calculated your project costs, you can then assess whether your development project is viable and profitable and worth progressing.

What is my finance based on?

As this is a short term development project, your finance will not be based on your income. Development finance is based on the feasibility of the project. This will be achieved by assessing you as a developer and the viability of your project. You will need to demonstrate that you have a track record and experience in developing property.

Where you have little or no experience, your lack of experience will be supported by employing relevant professionals - architect, project manager, professional builder etc. A fixed price contract with your builder may be advisable /insisted upon. You will also need to show that you have the funds to support contribution needed, cash or land owned outright.

What do I need to make an application?

We will need to see:

  • Purchase price or current value of property if owned
  • A breakdown of your build/conversion/renovation costs
  • Expected end value
  • Level of contingency
  • Costing with full breakdown
  • Timescale for the project
  • CV of experience - particular focus on property development
  • Details of relevant professionals involved with your project, architect, project manager, builder etc
  • Copy of planning permission, or link to your application on council's website
  • Building regulations
  • Details of any Section 106s or any planning restriction if applicable

Stages to obtaining finance

Enquiry

Once you have identified a suitable building project with planning permission, or own a project with planning permission, you should contact BuildStore to discuss finance options.

Indicative Terms

If the terms offered after your first enquiry, are attractive to you, one of our advisers will be able to fill out a brief development fact find and provide you with Indicative Terms from a suitable lender. This is usually within 24 hours after enquiry.

Agreement in Principle

This is when the lender writes outlining their offer of finance and charges. It will be subject to a number of conditions for example; valuation, copy of planning permission etc.

Site Visit

In most cases, the lender will want to come and meet you and your professional on site to discuss your project.

Valuation

A professional experienced surveyor will be sent to comment on aspects of your development. He will value the plot/property in its current condition and comment on likely build costs. He will also give an expected market value on completion and comment on the saleability of the finished project.

Offer

Before a lender issues a legal development finance offer, your application will be underwritten. This is confirmation of the exact terms of the loan and includes all costs involved ie. set up fees, interest rates etc.

In all cases, you will need your own solicitor to act on your behalf. It is important to use a solicitor that understands the processes involved in financing a development project. Choosing the wrong solicitor can cause unnecessary delays. The best solicitors are not always the cheapest and, if speed and efficiency are important, you may have to pay a little more - particularly to beat other builders competing for the project.

Where possible, employ a solicitor used and recommended by another developer and in your own local area. There will be occasions when talking to them direct or visiting their office at short notice will benefit you.

Completion

Completion is the term used to indicate that finance has been fully arranged and funds can start to be released. If you are buying the development, it is the last stage in the purchase of the site/building. The legal documentation is finalised and the lender has sent any mortgage funds if applicable to your solicitor.

At this point, you will add your contribution towards the purchase which will then be sent to the seller's solicitor. As soon as the seller's solicitor receives the money, the site/property will be yours. This means that development can start.

Completion is the last step in releasing funds and/or purchase but marks the first stage in starting your project.

How much can I borrow?

This will vary depending on your project. The advantage of this type of finance is flexibility. The best thing to do is call BuildStore once you have identified a suitable project. For an indication of how we could structure your finance, you can see some examples below:

Buying a building plot?

  • 30 - 50% of the purchase
  • 100% of build costs
  • Total amount borrowed must be below 50-60% of the project end value or GDV.

Buying a conversion or renovation?

If you are looking to buy a conversion or renovation, the loan amount offered can sometimes be higher than offered against a building plot:

  • 30-50% of the purchase
  • 100% of build costs
  • Total amount borrowed must be below 50-60% of the project end value or GDV

Build costs are always released in arrears. This means that funds are released after completion of each build stage. As all projects are different, your project stages will be determined by you. If the property or land is owned outright, then 100% of build costs will normally be offered. Also, funds against property/land value may be released and put towards your build costs to help your project's cash flow.

Project costs

It's vital to have a clear and accurate outline of all costs, prior to the purchase of a project, or commencing building work where the site is already owned.

When borrowing money for your project, you will have several fees to consider. The amount charged, and the structure of fees will depend on your project. Most fees can be added to your total loan, so in most cases, these costs will come out of profit, rather than your own cash reserve.

Your finance options will generally consist of the following charges:

  1. Set up Fee
    This fee will be charged as a percentage of the total loan amount you intend to borrow. It can cost anywhere from 1% and is usually added to your loan at the beginning of your project.
  2. Exit Fee
    Depending on your project, this fee will be based on the loan amount, or the end value of your development. You will be charged from 1% of your loan amount or from 1% of your project's end value.
  3. Interest Costs
    Your monthly interest cost will usually be based against the amount of funding released. This will mean that as your build progresses and further funds are released, your monthly payments will increase. In most cases, monthly interest will be added back into the loan. This is known as a roll up of interst.
  4. Professional Costs
    You will almost certainly have a range of professionals supporting you during your project, each with their own associated cost. These professionals may include solicitor, architect, project manager, to name but a few. Professional costs can be added to your loan, in most cases.
  5. Loan Term
    This is a short-term finance to help you develop the property/ies. It is paid back from the sale of the unit/s, or alternatively by re-financing on a buy-to-let mortgage where you plan to rent it out. Usually loan terms will be between 6 and 12 months. A longer term may be offered depending on the project. The key to development is speed. The quicker you can develop out your project and sell, or re-finance, the shorter the time needed to pay development finance costs, thus maximising your profits.
  6. Contingency
    This is the amount you have assigned for any unforeseen costs. Costs can increase for many unforeseen reasons - weather, delay of materials or services etc. Your lender will want to see that a contingency has been built into your costs, so that if any unforeseen issues occur, the costs are covered. Amount of contingency will depend on the individual project; however, a contingency of 15-20% would be considered average.

Building Regulations

Complying with Building Regulations is a separate matter from getting planning permission for your work. The Building Regulations set standards for the design and construction of buildings, primarily to ensure the safety and health for people in or around those buildings, but also for energy conservation and access to and about buildings. They apply to most new buildings and many alterations to existing buildings in England and Wales. You can apply for Building Regulations Approval through your Local Authority Building Control Service by submitting a full plans application.

It's important to understand building regulations because you are responsible for making sure that any work complies with them, if you are carrying out building work personally. If you are employing a builder, the responsibility will usually be theirs - but you should confirm this at the beginning. Also bear in mind that if you are the owner of the building, it is ultimately you who may be served with an enforcement notice if the work does not comply with the regulations.

Planning Permission

Outline Planning Permission

The purpose of such an application is to establish whether the principle of developing a piece of land, barn conversion etc, is acceptable, without becoming involved in the expense of preparing detailed plans.

In applying for outline planning permission, you can reserve one or all of the following matters: siting, design, means of access, external appearance, landscaping, until applying for approval of reserved matters.

Outline permission is valid for three years, but the period extends for up to five years, if reserved matters are applied for. A build cannot progress at this stage, as you will only have been given an outline that a development is acceptable. Detailed Planning Permission will be needed before a project can begin.

Approval of Reserved Matters

Approval of Reserved Matters is required following the granting of an outline application. The Reserved Matters application sets out the outstanding details of the proposal including; access arrangements, siting, design and landscaping etc. It also takes into account any conditions that have been given in the original outline consent. Reserved Matters must be applied for within three years of the outline consent being granted.

Full Planning/Detailed Planning Permission

You do not need to apply for OPP planning first as you can move straight to an application for Detailed Planning Permission (DPP). Where developers have a strong idea about a particular project, DPP or full planning permission can be sought. In order to apply for full planning permission, a very detailed development plan will need to be drawn up which will leave no unanswered questions when it reaches the planning office/department. Your development can commence as soon as full planning permission is granted and building regulations have been approved.

Land Title

It is important irrespective of the type of development that the lender offering development finance is able to have 1st legal charge over the development. This means that once the site is sold or refinanced, the lender is paid back any money borrowed first. This will be of particular importance when considering buying or owning a garden plot.

If you own a garden plot attached to your main residence or perhaps a property you rent out, it is likely that the garden is attached to your house title. If you have a mortgage on that house, it is again likely your mortgage lender has security over the house and garden. For your development lender to be able to take 1st legal charge over the plot, you will need to have permission from your mortgage lender to release the land from their security. Often they are happy to allow this, and the title can be split by your solicitor. Sometimes, however, your mortgage lender will not allow you to split the land off, or in some cases, will want your mortgage reduced to allow the split. Land will need to be split onto its own title before finance can be secured.

Section 106

Section 106 of the Town and Country Planning Act 1990, allows a local authority to enter into a legally-binding agreement or planning obligation with a landowner in association with the granting of planning permission. The obligation is termed a Section 106 Agreement.

Section 106 Agreements are a way of delivering or addressing matters that are necessary to make a development acceptable in planning terms. They are increasingly used to support the provision of services and infrastructure, such as highways, recreational facilities, education, health and affordable housing.

Build Sign Off, Architect Certificate or NHBC

As each stage of your build is complete, you will need to have a professional check that work has been completed to an expected standard. This will usually be completed by agreement with your architect or via the NHBC.

What is the NHBC?

The National House-Building Council is the standard setting body and warranty and insurance provider for new and newly converted properties in the UK.

Fixed Price Contract

The term fixed price contract refers specifically to a type or variety of fixed price contract, where you pay your builder a fixed amount and this amount will not waver or vary even where unexpected costs suddenly arise.

There are benefits of this type of contract to both you and your builder. To the builder, it is beneficial because it typically allows for the builder to charge a higher fee for his work. As the build cost is set at the beginning, your builder will build in a contingency for any additional work and costs. For you, it means that although you are paying a higher amount, you have peace of mind that this price is not going to change. This also makes the project more attractive to any lender.

 

BuildStore Development Finance is a trading style of BuildLoan Limited

BuildLoan Limited 2016, 8 Houstoun Interchange Business Park, Livingston, EH54 5DW T: 0345 223 4888 F: 0345 223 4666
Registered in Scotland SC447145 Registered office address: as above

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