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Development Financing

15th November 2023

By Ben Walker

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Residential development financing is hugely popular at the moment.

Especially to convert from commercial to residential use.

This new development financing loan could raise over 20% more cash against the property value.

In the past development financing for converting property to residential use would raise 65% to 70% of the value as the initial amount to purchase and complete the first phase of works. From this amount interest and fees are deducted – then a drawdown facility is put in place based on the GDV to do the work

This would net down to circa 60% to 65% in hand at day 1 – even less if the loan term was for more than 12 months.

How is the new development financing loan different?

  • Firstly, investors can now borrow up to 75% of the current value of commercial property to purchase / convert to residential.
  • Secondly, the interest element is on top of the 75% LTV – not deducted from the initial advance.
  • AND they can still then draw further funds to pay for the conversion based on the GDV

What does this mean to a developer?

It makes a massive difference to the amount of cash available to purchase or remortgage a commercial  property with planning to convert it to residential use. 

And, if extra cash isn’t needed, the additional money available could drop the loan in to a lower LTV band and therefore lower rates could be available.

Here’s an example or the new loan:

If buying a property valued at £1 million, Investors / developers could borrow £750,000 from which only fees and disbursements are deducted.

The interest  would be added on to the loan granted (not deducted) subject to not the loan exceeding 75% of the GDV.

Therefore, on a 24 month loan, the interest could exceed £100,000 which is now available as borrowings instead

How does it compare with current products

Previously, a typical bridging / development loan on commercial property over say a 24 months period would be capped at 70% gross loan resulting in circa £610,000 being available as a day 1 drawdown.

NOW with this new facility at 75% LTV plus the interest added to the LTV the loan could provide a £750,000 day 1 drawdown.

That’s up to £140,000 extra cash on a £1 million valuation available at day one. Of course, if the term is lower, the interest is lower and the cash out benefit is lower. But the difference is proportional and still massive by comparison to other products

The Headline Criteria

The following terms are available for conversion of most commercial properties to residential use.

Change of use to semi commercial can also be considered with the main considerations being a minimum of 60% of the proposed conversion is residential and the commercial elements are not “smellies” (curry house, laundrettes, bakeries etc)

Where a property valuation has been uplifted due to the granting of planning content to convert to residential, the day 1 valuation and advance is based on the value with planning even if the recent purchase price was lower.

Some adverse credit can also  be considered with acceptable explanations.

There is no age limit on the applicants

For Experienced Borrowers:

Borrowers must have experience of at least two ‘recent’ similar successful projects

  • Max 75% net day 1 LTV (net of interest but including fees)
  • 100% works funded in arrears
  • Max loan term 24 months
  • Max LTGDV 75%
  • The max works costs lower of £1m or 70% of initial value
  • Max facility £2.5m
  • Rates (based on initial LTV): 0.59% at 60% LTV to 0.79% at 75% LTV

For Inexperienced Borrowers:

Borrowers that don’t meet the experience criteria but have suitable contractors/professionals in place to carry out the works

  • Max 70% net day 1 LTV (net of interest but including fees)
  • 100% works funded in arrears
  • Max loan term 18 months
  • Max LTGDV 70%
  • The max works costs lower of £500k or 50% of initial value
  • Max facility £1.5m
  • Rates (based on initial LTV): 0.74% at 60% LTV  – 0.84% at 70% LTV

All of these rates and terms are correct at the time of publishing

Talk to a Promise Money adviser for more details

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