Development loans are geared towards the refurbishment and upgrading of both residential and commercial properties and projects. There are therefore numerous applications of this useful form of property finance.
Although previously restricted to larger developers and property investors with large portfolios and capital to invest, in recent years, this specialised type of finance has become much more widely available to more than just seasoned developers.
Common applications of development loans include both light and heavy refurbishments and typically includes:
- Upgrading bathrooms and kitchens
- Conversions and extensions
- Commercial projects such as pubs and shopping centres
- Developing offices and residential blocks
There are many lenders in the UK who are able to provide this type of finance to all nature of developers and property owners. However, it is important to ensure that the relevant permissions and applications such as Planning Permissions and local planning laws have been adhered to as necessary.
Commercial Property Development
Commercial property development covers premises used for business and commercial purposes including shop premises, warehouses, factories, offices and residential blocks. It is also applicable to ‘semi-commercial’ projects; where there is a residential element to a commercial project.
For example, there are residential premises above a shop. Whilst using this finance for these types of projects is relatively less common than for residential projects, as is the case with refurbishment finance, there is no shortage of commercial applications.
Commercial funding for development can therefore be tailored around specific business premises such as hotels and pubs to provide a bespoke finance solution for the specific needs of a particular project.
Loans for Commercial Development
As with other types of property finance and mortgages, there are specific, tailored options for development loans that are designed for specific commercial projects.
Hotel Finance – This covers the purchase and development of hotels, a continually profitable area in the UK, with the leisure industry being worth many billions of Pounds. This finance takes various hotel-specific factors into account such as Revenue per Available Room (RevPAR) and Average Daily Rates (ADR) so it is important to have a specialised lender on board.
Construction Finance – These loans provide the crucial funding needed for the purchase of land, building material and labour costs associated with a brand-new development. It can also cover other required costs such as planning application costs as well as architects and legal fees; specifically, for newly constructed projects.
Other common types of specific finance for development purposes includes:
- Pub Finance
- Shopping Centre Finance
- Stretch Senior Debt and Equity
- Student Accommodation Finance
This covers the development and construction of residential units and properties such as flats and houses. However, refurbishment loans are also classed as a form of loan for development and this takes the form of either heavy or light refurbishment works. Heavy refurbishments are more extensive works that alter the nature and/ or structure of a property whereas light refurbishments do not, constituting works around improving and upgrading properties prior to their rental or sale at an increased profit.
Using the value of a residential property as collateral for the loan, residential development loans allow developers and property owners to pursue works and improvements that will increase the value of the property in question on the property market.
These works often include converting properties into houses of multiple occupancy (HMO), where additional work to make the property fit for living as well as specific permission is needed. This type of finance may also cover the works needed to develop a previously uninhabitable site into a habitable residential project.
For example, a warehouse with a lot of space may be developed to provide numerous housing units. However, to do so required the investment to alter the entire premises accordingly and that is where development finance comes into play.
What are the Lending Criteria?
Although there are no hard and fast rules for these development loans, with every case being assessed on a case by case basis, there are a number of common factors which may influence the decision making of the lender and which may contribute to the amount lent. These may include:
- Location of the property/ project in question
- Gross Development Value (GDV) of the completed project
- Size and duration of the loan required
- Equity provided by the borrower from the outset
There will also be surveys and assessments required as part of the process leading up to the approval of a loan amount by a borrower
Is Planning Permission Required to Secure Finance?
Planning Permission is always important as without it a project would be deemed illegal and may need to be taken down. However, not all works require these permissions. For example, light refurbishment works do not routinely need Planning Permission whereas heavy refurbishments such as adding a basement of updating a house to become an HMO will do.
Therefore, in cases where additional permissions are not needed, the applicant will not necessarily need to show evidence of planning applications. In cases of heavy refurbishments and larger development projects, where Planning Permission is needed, lenders may still lend before permission has been approved but where it is a viable prospect and some may even help borrowers to apply for the necessary permission.
However, if the loan amount is provided before any permissions are acquired, it is likely that until Planning Permission is approved, the lender will only provide a reduces amount of funding. Once Planning Permission is gained however, they may raise the amount lent.