In some ways, property development is a business like any other. However unlike most businesses, property developments are usually one-off projects that may even be carried out using a company specifically incorporated for the project (a single or special purpose vehicle, or SPV) which may be wound up once the project is completed. Similarly, the funding requirements are somewhat peculiar in these respects. So the funding often needs to be held for a long period before being repaid. Unless you are arranging to pre-sell some of the units off plan (which generally involves giving some kind of discount) to generate cash as you go, there may well be little or no funds available to pay interest during the bulk of the project.

These specific requirements mean that property development tends to require the use of either: Whichever you use, you will need to be very careful in order not to come unstuck, as given the sums involved in most property transactions, running into problems can quickly lead to very serious financial issues. The funding options available generally fall into one of five categories which are: Each of these sources and their uses are discussed in turn below.

Specialist Property Development Funding Products

These are loans specifically designed to fund property development and which are available from both the high street clearing banks and specialist lenders.

A normal package of this type will typically be to advance:

• 60% or so of the site value; and
• 100% of the development costs on applications.

This lending is usually subject to an overall limit of 65% to 70% of the expected value of the completed development.

Lenders will be interested in understanding the planned sales process from the completed development, whether agents have been instructed and whether units are expected to sell off plan or on completion (as obviously the more units pre-sold, the lower the lender’s risk).

There are, however, issues in the standard approach to funding development.

• While funding of 100% of development costs on applications provides a seemingly sensible basis of funding for the build out, the lender’s desire to see the developer put in equity early means that any advance against the site cost is usually limited to 60% of the purchase price, leaving the developer to find 40% of this cost out of their own capital.
• The ability to draw down the funds on the basis of applications is fine in theory, but what if you have costs that you need to meet as you go? You will need to ensure that you have sufficient funds available in hand to meet such expenses.
• A loan of in theory 65% to 70% of the completed site value seems competitive, but of course this is always less the professional costs. These will often bring the total possible advance down to closer to 60% by the time the developer has paid for a quantity surveyor’s site visit for every drawdown and the lender’s top quality legal team.
• Then there’s the simple sounding 1% in, 1% out facility fee, which often tends to turn into £500 to £1,000 exit fee per unit, which can be rather more than the 1%.
• All this is in addition to the ongoing 3% to 4% over base rate charges.

In some cases therefore this type of standard approach is better replaced by careful use of ordinary commercial loans as covered below. In others it will need to be topped up with funding from other sources.

Developers using this type of funding also need to be on the look out for other issues, as below.