Property development finance: what is it for?
Property development finance can be used for residential property development, industrial property development, commercial property development including retail, office; mixed-use developments and even land subdivision.
- Residential property development
- Retail/Office/Industrial property development
- Land subdivision
- Mixed-use property development
What are the maximum loan to value ratios available for property development loans?
Property development loans are based on either gross realisable value (GRV) or land development cost (LDC). Generally GRV development loans can be up to 65% - 75% of the gross realisable value of the development. If financed on a land development basis, LDC loans can be up to 80% of development costs.
Mezzanine finance for property development
Sometimes the property developer may want to increase their loan to value ratio. In this case mezzanine finance for property development may be required. Mezzanine finance can increase maximum loan to value ratios but is typically charged at a much high interest rate than base funding. However, as the amount of mezzanine funding is low compared to the overall amount borrowed the total cost of mezzanine funding is relatively small. This can mean that the development may still be highly profitable when mezzanine finance is used.
Property development finance Characteristics
Generally property development loans are interest-only or even interest capitalised during the construction phase. The development funds are drawn-down progressively as progress is made and payments become due. Typically property development loans are short term. The entire loan is repaid (principal and capitalised interest) upon the completion of the development project. This can be done through the sale of the development or by refinancing the development loan into a longer term commercial loan.
Property development loans can be either full doc (where the developer provided all of the required documents) or low doc (where limit documentation about the developers financials are provided).
- Progressive draw down
- Capitalised interest
- Short term
- Full doc & low doc options
Finance for before the development begins
Sometimes the site will not be ready for the development to begin. In this case short term commercial bridging finance may be required.
First published on Oak Laurel : Property development finance: what is it for?