Introduction

Property development finance plays a pivotal role in the Scottish real estate landscape, enabling developers to transform concepts into tangible assets. Whether you’re a seasoned developer or a newcomer, understanding the intricacies of financing is essential. In this guide, we delve into the specifics of property development finance in Scotland.

1. Mechanics of Property Development Finance

Understanding the mechanics of property development finance is crucial. Here are the key components:

2. Loan Amount

The loan amount typically represents a percentage of the property or land purchase price. Additionally, lenders consider funding for refurbishment costs or ground-up construction. As a developer, you’ll receive the necessary capital to kickstart your project.

Property Development Finance: Typically, property development loans in Scotland can be used for a borrowing requirement of £750,000 to £50,000,000 with a loan term of 9 to 36 months.

Bridging Loans: Typically, bridging finance can be used for property development projects with a borrowing requirement from £50,000 to around £2,000,000 with a loan term of 3 to 24 months.

3. Loan Term

Property development finance in Scotland can span from 6 to 30 months. Repayment occurs either from the sale proceeds or through refinancing. The goal is to complete the project efficiently and repay the loan promptly.

4. Monthly Drawdowns

Throughout the development process, lenders release funds based on Quantity Surveyor reports. These reports ensure that the funds align with the project’s progress. As milestones are met, you can access the necessary capital to keep the project moving forward.

5. Choosing the Right Solution

Selecting the right financing solution depends on various factors:

• Project Scale: Consider whether your project involves light development, extensive renovation, or ground-up construction.
• Experience: Your track record as a developer influences the financing options available to you.

6. Popular Uses for Property Development Finance

• New Residential Projects: Property development finance is ideal for ground-up developments, such as building new housing estates or apartment complexes. It covers land acquisition, construction costs, and infrastructure development.
• Renovating Existing Properties: Developers can use property development finance to transform old or dilapidated buildings into modern, desirable spaces. This includes renovations of historic properties or repurposing industrial sites.
• Property Conversion - Change of Use: Property development finance supports converting existing buildings for different purposes. For instance, turning a former office building into residential apartments or converting a warehouse into creative workspaces.
• Private Rented Sector (PRS) Schemes: These involve developing residential properties specifically for renting. Build to Rent schemes cater to the growing demand for high-quality rental accommodation.
• Commercial Developments: Property development finance can fund the construction or renovation of commercial spaces such as offices, retail centres, and warehouses. These projects contribute to economic growth and job creation.
• Mixed-Use Developments: These combine residential, commercial, and sometimes leisure spaces within a single project. Examples include live-work developments, where residents can run businesses from their homes.

Conclusion

Property development finance bridges the gap between vision and reality. Seek advice from experts, explore your options, and embark on your Scottish property journey with confidence. Remember that each project is unique, and finding the right financing partner is essential.

Before you Begin the Application Process:

Consult with an Expert Property Development Finance Broker: At Evolve Finance we understand how property development finance works and can guide you through the intricacies of the process, helping you explore all available options.

In the dynamic world of property development, the concept of Build to Rent (BTR) has emerged as a transformative force, reshaping the approach to residential projects. At its core, BTR is a strategy that caters exclusively to the rental market, diverging from the traditional focus on sales. This innovative financing model is not just about constructing buildings; it’s about fostering communities and redefining urban living.

Understanding Build to Rent Development Finance

Build to Rent Development Finance is a specialised loan designed for professional property developers and landlords with an eye on the burgeoning rental market. Unlike traditional property development loans, BTR finance is tailored to support the construction of properties intended solely for renting. This financial solution effectively bridges the gap between the upfront costs of development and the subsequent rental income.

How It Works

BTR Development Finance operates similarly to a traditional mortgage, where a sum is borrowed and repaid over time. However, it distinguishes itself in several ways:

• Funds are released in stages, corresponding with the development milestones.
• The loan is secured against the properties under development.
• Repayment is typically sourced from rental income or refinancing post-completion.

Who Benefits?

This type of finance is ideal for developers aiming to create multiple rental properties and landlords seeking a bridging solution to manage development costs before the rental income stream begins.

The Advantages of Build to Rent

The BTR model offers numerous benefits:

• Stable Income Stream: Long-term rents provide a consistent revenue source.
• Community Building: Developments often include communal spaces, enhancing tenant satisfaction and retention.
• Attractiveness to Investors: The predictable returns appeal to institutional lenders, such as pension funds.

Key Considerations

When considering BTR Development Finance, developers should weigh several factors:

• Market Demand: Ensuring a strong rental market is crucial for the project’s success.
• Quality of Development: High standards can command higher rents and attract long-term tenants.
• Financial Planning: Accurate cost projections and cash flow management are essential.
• Exit Strategies: It’s crucial to have a well-planned exit strategy, a long-term commercial mortgage can be put in place before the start of the build to repay the BTR finance upon completion of the build. Alternatively, development exit finance can be utilised when the project is nearing completion and whilst waiting on the long-term mortgage completing.

Conclusion

Build to Rent Development Finance is more than just a funding mechanism; it’s a catalyst for innovation in the property development sector. By aligning financial strategies with the needs of modern renters, developers can not only profit but also contribute to the evolution of urban housing.

Before you Begin the Application Process:

Consult with an Expert Broker: At Evolve Finance we understand how build to rent development finance works and can guide you through the intricacies of the process, helping you explore all available options.

Development finance is a specialist type of secured loan, issued for the purpose of constructing, converting, renovating and repurposing properties. It is a strictly short-term facility, designed to be repaid within around 18 months of the issue date. Like most types of specialist commercial loans and development loans, development finance is typically granted exclusively to experienced developers and construction companies.

Q1. How does development finance work?

Development finance differs from a conventional mortgage in that the lender takes into account the estimated value of the completed property - not just the value for the development at the time the loan is issued.

A brief overview of how development finance works:

• The developer submits an application, complete with full disclosure of their requirements and detailed project projections.
• An offer is made by the lender to cover a proportion of the project’s costs, typically up to a maximum LTV of 85%.
• If the loan is approved, both parties sign the contract and become legally bound by its terms and conditions.
• The first instalment of the loan is then released, followed by subsequent instalments tied to the completion of key product stages. 
• Interest accrues on a monthly basis at around 0.5%, and the loan is repaid in full on a predetermined date between 6 and 18 months later. 

Q2. Who uses development finance?

Development finance is used by experienced developers and construction companies, who would prefer not to invest too much of their own capital in their projects. 

By covering anything from 75% to 100% (with mezzanine funding) of a project’s costs, developers have the opportunity to run multiple projects simultaneously. This would not be possible if they invested all of their own capital in any given project, making development finance their preferred choice.

Q3. What paperwork do I need for development finance?

Documentation requirements vary in accordance with the nature and extent of the funding required. However, most development finance specialists will expect to see the following as the bare minimum:

• The value of the property at the time of your application
• The estimated final value of the completed development
• An overview of all construction and renovation costs
• A complete dissection of the project’s schedule and deadlines
• Extensive evidence of your experience and track record
• Examples of successfully completed similar projects
• Full disclosure of all providers involved in this project
• Confirmation of receipt of planning permission and permits
• Acknowledgement of any restrictions that may apply

Your broker will advise on all the necessary paperwork to submit your application, during your initial consultation.

Q4. Can I qualify for development finance if I have bad credit?

It is technically possible to qualify for development finance with bad credit, but you are unlikely to qualify for lenders’ most competitive deals. If you are concerned about your credit score (or general financial background), it is essential to consult with an independent broker to discuss the alternatives to development finance. A subprime product from a specialist lender could prove more affordable, depending on the type of property development project you have in mind.

Development finance offers the kind of flexibility that can accommodate the vast majority of larger-scale property development, conversion and construction projects; examples of which include repurposing entire properties, partially or completely demolishing properties to be rebuilt from the ground up, or transforming the early properties into luxury multi-purpose developments.

Importantly, development finance affords developers the opportunity to cover up to 100% of the total costs of the project - without eating into their own capital. As established developers often aim to have several projects on the go at the same time, this alone can make development finance a uniquely beneficial financial tool.

100% Project Costs Covered

The initial loan issued by a development finance specialist is referred to as ‘senior’ development finance, which is usually offered with a maximum LTV of 85%. This means that the primary loan secured against the development can be taken out to cover no more than 85% of the total project’s costs.

Another slightly different form of development finance is offered by some lenders, referred to as ‘stretched’ senior finance. This is where (under special circumstances) a lender is willing to increase this maximum LTV to around 90%, leaving just 10% of the project’s costs to be covered by the investor.

Again, property developers and investors often seek to minimise the direct investment of their own capital, in order to enable them to execute multiple projects simultaneously.

Whether the initial loan taken out is a standard senior development loan or stretched senior finance, the remaining funds do not necessarily need to be provided by the developer. There is also the option of seeking ‘mezzanine’ finance - a facility used to top up an initial development finance loan, which sits behind the first legal charge of the senior lender. 

Second-Charge Borrowing

Mezzanine finance can be used to take the developer's total borrowed funds from the initial 85% or 90% right up to 100% of the project’s total costs. A mezzanine finance facility will usually be sought from a separate lender to the first product, issued as a second-charge loan against the borrower’s assets - usually the development itself.

While mezzanine finance can be affordable in terms of monthly interest and borrowing costs, it is a facility which is usually issued on the condition that the lender takes a proportion of the final profits on the development from the borrower. This is not always the case, but some mezzanine finance facilities include a clause wherein up to 50% of the developer’s profits are claimed by the lender, upon completion of the project.

This is one of many reasons why it is essential to seek independent broker support, before applying for development finance. Irrespective of your target LTV or the nature of your project, broker support always paves the way for an unbeatable deal and the flexible terms you need to successfully complete your project.

From Oliver Stone’s epic Wall Street to the hilarious Trading Places and recent Scorcese hit The Wolf of Wall Street, the topic of finance has inspired many a classic film. It’s no surprise when you ponder on the varied world existing within finance, which takes in everything from making ends meet to making personal millions.

Consider the colourful characters often found within these situations and you’ve got a blueprint for classic drama. Think Gordon Gekko. Think Patrick Bateman. Think of Enron’s story and it’s hard remember where fiction ends and fact begins.

Find the 10 Best Films about Finance below. We’ve also analysed the books to discover how well each film did at the box office, compared to their monetary budget. In the film world of finance, alongside tales of highs, lows and even humour, there’s definitely some money to be made!

Infographic by ABC Finance