Commercial Mortgages and Development Finance

There can be a lot of confusion surrounding Development Finance and what it implicates within the financial world. A question that is frequently asked is: What is the difference between Development Finance and Commercial Mortgages? And this is where the confusion often stems. Development finance is where an individual or company/business is looking to develop property/properties and have some capital but need a short term loan to help complete the development. Depending upon the lender and the circumstance, such loans normally span between 12-24 months. Commercial Mortgages on the other hand, are usually only required once the development has been completed and additional funds are necessary. Hence, Development Finance and Commercial Mortgages do tend to overlap. Despite the "Credit Crunch", Development Finance is rapidly becoming more main-stream and is a very specific type of finance. High street lenders are very active within this market as development finance is popular with people, small and large businesses alike. It is recommended that you seek professional advice in order to find the right deal for you.

Typically in the UK, Development Finance is used for various development plans such as; Property Refurbishment, New Build Projects, Property Conversions and initial land purchase and international projects. Additionally, there are various types of Development Finance which undoubtedly adds to the confusion and uncertainty surrounding the term. For example, a Senior Debt Loan usually covers the first 70% - 80% of loan to value although it can be arranged against gross development value. A Mezzanine Loan is a second charge loan on top of the senior debt loan, usually used to fund costs on one property while a developers financial resources are tied up elsewhere. Finally, Joint Venture 100% Finance contracts you with an experienced partner who underwrites the project and shares the profits upon completion.

Property development is about having a vision; it's about understanding the market and turning that vision into a reality. However, developers often have problems getting the finance right and knowing what products are available and which lenders to use can be confusing. The forms of development finance are dependent upon personal circumstance, for example whether you are a company wishing to expand, a home owner hoping to develop, or a home owner looking to start anew. Funding is also available through this method for community projects which aim to provide; economic development, affordable housing and community development financial services. Therefore, Development Finance is determined entirely upon an individual assessment made by the lender. Lenders will look specifically at aspects of the development proposal, such as; land purchase, ground work/services, footings/base, first fix/second fix and final snagging/sign off. In the difficult current market, lenders have to be more careful when choosing which developers to back; they are much more likely to support a developer with experience in the field than someone new to the industry.

Development Finance lenders are there to build a relationship with the developer in order to share their vision and provide the support needed to make that vision a reality. This type of loan is ideal for use against labour costs, professional costs (for example, architect drawings) and other building costs. Property development loans will be secured against the land or the property you wish to develop. Newer forms of Development Finance funds are available either for debt, mezzanines or equity in combination with primary lending sources. More traditional forms, like with Commercial Mortgages, normally require a deposit of at least 20-30%.

Loan to Value rates and interest rates vary depending upon experience and percentage of funds required for development. Advantages of this form of financial assistance include it can be raised quickly, turning your dream into reality sooner rather than later and that each proposal is considered on its individual merit. Additionally, the lender will be continually on hand to support the developer with advice and help manage the development funds. No matter what you decide to do with your completed project, whether you plan to sell in order to start the next project or whether you retain the project for investment purposes, Development Finance is a flexible solution to suit your financial needs.

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