Pete Mugleston | Mortgage AdvisorPete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.
Updated: 11th September 2019 *
How to finance a new commercial property development
We receive lots of enquiries from property developers who have a particular project in mind and would like to consider the different commercial finance options available to them for their development.
Whether you’re a first-time developer looking for an introduction to commercial property finance development and investment or an experienced builder trying to establish what the market has to offer, hopefully the information below will answer all of your queries.
If you need to borrow money for either a new building project (particularly a large one) or a comprehensive renovation, commercial property development finance is often the most suitable funding method.
Well, in the UK, commercial development finance is closely aligned with bridging finance. Both offer short-term access to funds (usually on an interest-only basis) with a pre-defined exit strategy, usually refinancing or to sell the development at a clear profit. They can also be arranged much quicker than a commercial mortgage.
However, there is one key difference that sets them apart. With a bridging loan all the funds must be accessed in one go and interest is paid on the full amount.
For commercial development finance, you can take the capital for the construction work in tranches as the project progresses. This way you only pay interest on the funds that have been released.
The ability to gain access to funds only as and when required offers quite a distinct advantage to developers who are involved in projects of this nature.
What types of commercial property can I use development finance for?
The array of projects that can utilise development finance is pretty extensive. Commercial, mixed-use or residential properties can all use this type of funding, for example:
As already mentioned, commercial development finance is not confined to new-build ventures but can also be used for restoration projects. It’s not unusual, these days, to see derelict factory mills converted into flats and offices or old churches reconfigured as restaurants, once the necessary permissions have been granted.
Any business or developer looking to fund a development project will be attracted to this type of borrowing as it can assist with both the purchase of the land and the actual building costs.
If you’d like to know more about what types of projects you can use development finance for, make an enquiry and we can arrange for an expert to get in touch.
How does development finance differ from commercial mortgages?
There’s quite a few differences, really. Commercial mortgages are typically used to buy a business that is already trading, new premises for commercial activity and for renovations or expansion.
As outlined above, commercial development finance is specifically for new business projects, major renovation or restoration work where no commercial activity is currently operating. Most lenders would offer development finance over the short term, usually from 3 months to a maximum of 3 years (tailored to the specific project timescale).
You’ll need an exit strategy to get a development finance loan
An application for commercial development finance cannot be agreed without agreement of a clear exit strategy. This is actually the point where the two types of funding may cross paths as one of the options for a business can be to refinance using a commercial mortgage or sell the development once it is finished.
Commercial mortgages are usually available from 3 years up to 30 years, therefore, are well placed to dovetail alongside a commercial development finance deal if refinancing is the preferred exit strategy for the business.
The other main difference you should be aware of is that interest rates are typically higher for development finance loans than commercial mortgages.
You should also consider that most lenders will carry out a site inspection before each stage of development capital is released and will charge the borrower each time they attend, adding to the overall cost.
Are first-time developers eligible for commercial development finance?
Yes, it’s possible. Most lenders will gain confidence in an application depending upon the level of experience you have working on previous development projects. However, some lenders will consider developers delving into projects of this nature for the first time, as long as they are able to produce a solid business plan and evidence a viable exit strategy
Commercial development finance is quite a specialised and bespoke form of lending, therefore, each project will be reviewed upon its own merits. Most lenders will keep an open mind when considering the eligibility and affordability of each case, but for the best advice, speak with an advisor.
The main areas lenders will focus on are:
A strong track record in the specific commercial activity the project is designed for is quite important. Previous property development experience would also be advantageous. If the main project leaders are lacking in experience but have hired a management team to work with those who are, this would be beneficial.
As mentioned previously, this is essential to secure the loan. There needs to be clear evidence that the completed project has sufficient scope for refinancing or can raise enough capital through a sale to clear the debt. The brokers we work with can help you arrange a viable exit strategy, if this is necessary.
As commercial development finance is unregulated in the UK, a poor credit rating would not necessarily scupper any hope of funding unless the lender felt this placed the proposed exit strategy in jeopardy, but clean credit is likely to help convince them that the deal is low risk.
Deposit and security
Most lenders would offer a maximum loan to value (LTV) between 70-75% for the element of the loan used to purchase the site and would usually be able to cover the total amount of the actual building/renovation costs. However, some lenders may be willing to accept a smaller deposit.
Depending upon the amount of security a developer is able to offer, some lenders may be able to offer up to 100% LTV for the entire amount required. A profit share agreement between the lender and developer could also be considered in order to secure the full amount.
Is it advisable to use finance brokers for commercial development finance?
Yes. It is the smarter way forward in order to establish which lenders are offering the best terms, particularly if you’re venturing into this type of funding for the first time.
Trying to scour the market yourself can be pretty time consuming and lodging applications as you go along could have a knock-on effect on your credit rating. Using a finance broker to source the right commercial development finance that suits your requirements is the shrewder solution.
We work with a number of finance brokers well versed in this type of commercial funding. If you make an enquiry we can arrange for one of these experts to get in touch.
What are the alternatives to commercial development finance?
In addition to commercial development finance, other alternative funding options include:
A bridging loan is sometimes used as an alternative to commercial development finance if, for example, a business or developer has sufficient capital for the building work and only requires finance to buy the development site.
Remortgaging existing arrangements
If sufficient equity to cover development costs for any new project can be raised by remortgaging an existing commercial property portfolio, this may be a more viable option (and cheaper).
Depending upon the size of the project, a commercial loan could be a consideration. If the amount required is relatively minor (up to £25,000) then this option could be more appropriate and would not require any security for the loan.
Joint venture property development finance
Technically, this is still the same thing however, as the name suggests, this would be on a joint basis between the developer and lender. In this case, the developer borrows all the money (with no deposit) and the lender charges a higher interest rate whilst claiming a share of any profit (typically between 40-50%).
Mezzanine finance should be viewed more as an addition to commercial development finance rather than an alternative, if extra funding is needed to complete the project. The entry level for mezzanine finance is quite high (usually £250,000), with typical loan to values up to 75% and maximum 90% of the remaining development costs.
Why you should speak to a commercial development finance broker
It’s always advisable to seek professional advice before venturing into a large business deal. That’s why we only work with the best brokers available. We can offer you a first-class service tailored to your own specific needs with access to the most experienced brokers available that:
Have whole of market access
Have excellent relationships with development finance and commercial lenders
Are OMA accredited advisors
Have completed a 12 module LIBF accredited training course
Can offer bespoke advice on commercial property development
Speak to a commercial development finance expert
If you have questions and want to speak to an expert for the right advice, call us on 0808 189 2301 or make an enquiry here. The experts we work with have whole-of-market access, meaning that they can find the best deals available, even if they’re not directly advertised to the public.
*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA.Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.
Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes.
The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.
Pete's presence in the industry as the 'go-to' for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!
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