Fair Rents (Scotland) Bill or Artificial state manipulation of free market rent?10:34 AM, 6th November 2020
About 4 weeks ago 36
Roll back the clock to pre credit crunch time and developers were generally financed through their banks. Due to a dearth of readily available finance from this traditional source, a number of new entrants entered the market. With the number and variety of existing and new lenders, development finance has become a far more complex road to navigate than before.
We have categorised the different types of lenders into five classes. Within these are a number of sub classes and also various cross overs. In order to keep this article to a reasonable length we have made a number of generalised statements.
1. High Street Banks
These were the traditional lenders. However today, it is difficult to access funds from this source. Often they will only lend to existing customers and have a minimum loan amount of £500,000 plus. They will typically lend about 60% of the costs at a rate of 4% over base. Because of the scarcity of funds, they are very selective about which schemes they will finance and often the decision process can be very protracted and often can end with “sorry but no”
2. Merchant banks
These banks historically funded developments that didn’t meet the requirements of the High Street Banks and charged a premium interest rate for the privilege. Today they are funding developments that would have previously been funded by the High Street Banks and are charging an interest rate of 7% and in some instances charging an exit fee of between 1 & 2% of the Gross Development Value (GDV).
Normally they will want to lend a minimum of £500,000 and they can also be quite selective as to which deals and geographical areas they will fund. Typically they will lend up to 55% of the GDV.
3. Specialist Development Lenders
These lenders will often lend where the two categories above won’t. They are more flexible and less demanding in terms of experience, credit etc. They will typically lend around 75% of all costs and will often allow a mezzanine lender to come in behind them with an additional 15% of the costs.
This means that the developer is only required to put in 10% of the costs. These Specialist Lenders will typically charge interest at about 8% pa and will have negotiable exit fees. The minimum loan amount varies from lender to lender.
4. Private Companies
These companies are usually funded by High Net Worth Individuals and other institutions. They will typically lend up to 90% of all costs or 70% of the GDV.
Typical interest rates are around 12% pa with a 2% arrangement fee and various exit fees. This is very much a growth area with interest rates on deposits being at an all-time low.
5. Private equity partners
This type of investor normally operates through a joint venture arrangement. They will often lend up to a 100% of the costs, but usually require interest on the loan amount and also a good proportion of the profits. As they are bearing the financial risk they will only get involved with experienced developers on developments that show a good return.
The Development finance market has evolved over the last few years. There are now more options and combination of options than ever before.
Given the complexity of the funding available if you need assistance with financing any type of development project just complete the form below and I will be pleased to help.
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