Can a first-time developer get approved for a development finance loan? More specifically, a ‘ground up’ development finance loan?
Yes they can if they know what they need to do to prepare their application.
It is a bit of an urban myth to suggest that the only people who qualify for development finance loans are experienced developers. We provided a development finance loan to a first time developer in Christleton, just outside Chester, despite the 6 month battle he had with the Cheshire West and Chester council planning department. You can check that out here: Property Development Finance Chester
Of course lenders would prefer that all of their borrowers or developers have experience, however it is not the be all and end all.
There’s not much difference between an individual having a lot of experience in property development or that of an inexperienced individual who has an experienced and professional building and professional team working right alongside them. Development finance loans are not just the preserve of the rich or well connected – they can be and are available to everyone.
In fact we would go as far as to say that a borrower who has experience of buying and selling properties, refurbishing them and perhaps adding extensions or making major alterations that has no ground up experience but also has a hugely experienced team working with them, is a better bet for the lender than an experienced property developer who is subcontracting work out to lots of other individuals. Please note: All lenders will insist on collateral warranties on the design and build team (main contractor, architect, etc)
Every lender who lends money on a property development finance project will also retain the services of an experience qualified quantity surveyor or QS. This QS acts on behalf of the lender to ensure that the build is being done to a satisfactory standard, that meets all current building regulations and they will also ensure that the build is on time and under budget.
Although the QS is paid for by the borrower they actually in the interests of the lender. The borrower will have to pay the QS for an initial report which will be addressed to the lender and they will also have to pay for every visit and ever report thereafter, that the QS makes to the site.
These reports are then used as the basis for the drawdowns which the lender will agree to only after they have received a report from the QS that is satisfactory and presents no issues. Any lender offering development finance loans will insist on this happening.
Furthermore, the lender will also ensure that their own stuff, usually a member of the senior management team, we’ll go out regularly to inspect the property and meet with the borrower and developer to ensure that they also have a good understanding of where the development is currently at. Quite often these visits to the site alone, will be unannounced.
Development Finance Loans
In terms of land sizes on development finance loans for first time developers, it is unlikely that any lender will approve alone above £2 million. Certainly not for the first development by this particular borrower or developer. When the build has been completed satisfactorily and the properties are either sold or the loan is refinanced to another lender, then the existing lender will consider lending more to the borrower the next time they come to fund a project.
The other thing which will make it easier for the first time developer to get approved for finance, will be if the security or land in question, that they are looking to buy is in an area where there has been other residential development, then the chances are that the lender will look at this more favourably than if a developer was looking to build on say brownfield sites.
This is because brownfield sites are, as a name suggests, sites that have previously housed industrial or commercial units or buildings and not residential, this means that could be unknown issues when building residential for the very first time, but when we say unknown issues, we usually mean problems that could be discovered underneath the ground and not above.
- Make sure you have an experienced and professional team working alongside you
- Make sure you have a detailed development appraisal
- Make sure all of your numbers stack up particularly sales values, build costs, infrastructure costs, finance costs and any associated professional fees
- Make sure you have a clearly defined exit, in other words, how you will repay alone on time and on the budget
- Be clear, honest and transparent in all your dealings with the lender
To find out more, contact us.