HOW DEVELOPMENT EXIT FINANCE CAN TRANSFORM YOUR PROPERTY PROJECT
Are you a property developer who has completed or nearly completed a project, but need to repay your development finance by a set date? Do you want to reduce your borrowing costs, extend your sales period, and release some of your capital?
If so, you may want to consider development exit finance, a type of short-term loan that can help you achieve your goals and transform your property project.
In this article we explain how it works, and what benefits it can offer. We also discuss some of the factors that you need to consider before applying for it, and how to find the best lender and deal for your project.
WHAT IS DEVELOPMENT EXIT FINANCE?
Development exit finance comes into play when the development is nearing completion or you’re waiting for sales to finalise. It is a form of bridging loan that repays the development finance and raises capital for other purposes once the project is finished or close to being finished.
Exit finance is not a new concept, but it has become more popular and accessible in recent years, thanks to the increased competition and innovation in the bridging loan market. More and more lenders are offering this financial product, with flexible and tailored terms and conditions, to suit the needs and preferences of different developers and projects.
HOW DOES DEVELOPMENT EXIT FINANCE WORK?
It works by providing a new loan that replaces the existing property development finance. The new development exit finance is usually offered at a lower interest rate, as the project is considered less risky once it is completed.
The new loan can have a term typically between 3 and 24 months, which gives the developer more time to sell the property or arrange long-term financing. The interest on the new loan is usually rolled up, meaning that it is added to the loan amount and paid at the end of the term.
To apply for development exit finance, the developer needs to provide some information and documents to the lender, such as:
• The details of the existing development finance, including the loan amount, the interest rate, the term, and the repayment date.
• The details of the property project, including the location, the size, the type, the planning permission, the building regulations, the completion certificate, and the insurance.
• The details of the exit strategy, including the expected sale price, the marketing strategy, the sales progress, and the backup plan.
• The details of the developer, including the financial profile, the experience and track record.
The lender will then assess the application and conduct a new valuation of the property to determine its current market value and its potential sale price. Based on the valuation and the other factors, the lender will decide whether to approve the application and what terms and conditions to offer. The lender will then issue a formal offer letter, which the developer needs to accept and sign. The lender will also instruct a solicitor to carry out the legal work and prepare the loan agreement. Once the legal work is completed and the loan agreement is signed, the lender will release the funds to the developer, who can then use them to repay the existing development finance.
WHAT ARE THE BENEFITS OF DEVELOPMENT EXIT FINANCE?
The developer can free up some of their capital that is tied up in the project, and use it for any other purpose such as starting a new project. This can improve the liquidity of the developer, and enable them to seize new opportunities.
Development exit finance can offer several other advantages for property developers, such as:
• Reducing the borrowing costs and increasing the profit margin. By switching to a lower interest rate, the developer can save a significant amount of money on the interest payments, especially if the sales process is slow or delayed. This can boost the profit margin and the return on investment of the project.
• Relieving the pressure of having to make quick sales. By extending the term of the loan, the developer can avoid the stress of having to sell the property within a tight deadline, which may force them to accept lower prices or offer discounts. This can also give the developer more flexibility and control over the sales process, and allow them to wait for the best market conditions and the best buyers.
• Keeping some of the sale proceeds. Unlike development finance, which usually requires the developer to use all of the sale proceeds to repay the loan, development exit finance allows the developer to keep a percentage of the sale proceeds, depending on the lender’s terms and conditions. This can provide the developer with some extra income and reward for their hard work and risk-taking.
WHAT ARE THE FACTORS TO CONSIDER WHEN APPLYING FOR DEVELOPMENT EXIT FINANCE
Development exit finance is not suitable for every project or every developer. There are some factors that need to be considered before applying for it, such as:
• The cost of the new loan. Although the new loan usually offers a lower interest rate than development finance, it still comes with some fees and charges, such as arrangement fee, valuation fee, legal fee, and exit fee. These fees may vary depending on the lender, the loan amount, and the loan-to-value (LTV) ratio. The developer should compare the cost of the new loan with the cost of the existing loan, and make sure that the savings are worth the switch.
• The value of the property. The lender will require a new valuation of the property to assess its current market value and its potential sale price. The valuation will determine the maximum amount and the LTV ratio of the new loan. The developer should ensure that the property value has not decreased since the start of the project, as this may affect the eligibility and the terms of the new loan.
• The exit strategy. The developer should have a clear and realistic exit strategy for the project, whether it is selling the property, refinancing it, or retaining it. The developer should also have a backup plan in case the primary exit strategy fails or takes longer than expected. The developer should be able to demonstrate to the lender that they have the ability and the intention to repay the new loan within the agreed term.
HOW TO FIND THE BEST LENDER AND DEAL FOR DEVELOPMENT EXIT FINANCE
Finding the best lender and deal can be challenging, as there are many factors to consider and compare, such as the interest rate, the fees, the term, the LTV, the exit criteria, and the service quality.
One of the best ways to find the best lender and deal is to use a professional broker or adviser who can help the developer with the following tasks:
• Searching and sourcing the most suitable and competitive lenders and deals in the market, based on the developer’s needs and preferences.
• Preparing and presenting the application and the supporting documents to the lender, in a clear and convincing manner.
• Liaising and communicating with the lender, the solicitor, and the valuer, throughout the process, to ensure a smooth and timely completion.
• Advising and guiding the developer on the best practices and the potential pitfalls and answering any questions or concerns they may have.
Using a professional broker or adviser can save the developer a lot of time, money, and hassle, and increase their chances of getting approved and getting the best deal for their project.
CONCLUSION
Development exit finance is a viable option for property developers who want to reduce their borrowing costs, extend their sales periods, and release some of their capital. It can help them transform their property project and achieve their goals. However, it is not a one-size-fits-all solution, and it requires careful planning and evaluation. The developer should consult a professional broker or adviser who can help them find the best lender and the best deal for their project.
APPLYING FOR DEVELOPMENT EXIT FINANCE: A STEP-BY-STEP-GUIDE
Before you begin the application process, ensure you have the following:
• Photo ID: Gather your identification documents.
• Proof of Address: Provide evidence of your current address.
• Financial Records: Collect relevant financial documents related to you or your business.
Consult with an Expert Broker
Reach out to a broker experienced in this type of short-term finance. They can guide you through the intricacies of the process, help you explore available options, and provide personalized advice.
Understand How It Works
• Secured Lending: The loan is secured against the property or properties you’re developing. If you fail to repay, the lender has the right to take possession of the property.
• Repayment Sources: Repayment typically comes from sale of the properties or through refinancing to a longer term commercial mortgage.
Who Is It For?
• Professional Property Developers: Those experienced in property development.
• Landlords & Investors: Developing properties for letting.
Advantages
• Designed specifically to repay existing development finance.
• Allows the developer to capital raise and swiftly move on to the next project.
• Secured Lending: Property acts as collateral.
Disadvantages:
• Criteria: Lenders assess experience, track record, and project viability.
Application Process
• Speak to an experienced commercial finance expert who understands development exit finance.
• Provide Documentation:
• Detailed business plan.
• Financial projections.
• Evidence of your development experience.
Receive Heads of Terms: If your project aligns with build-to-rent criteria, you’ll receive initial terms within 24 hours.
Remember, thorough preparation and professional guidance are essential for a successful build to rent development finance application. Whether you’re building apartments, townhouses, or other rental properties, understanding this unique financing option can open doors to lucrative opportunities in the property market!
