Over the past few years, the property development finance market has become more competitive, with more lenders entering the space to cater to increasing numbers of developers and projects. Lenders, needing to stay competitive, have adapted and changed their offering to meet developers' needs better. As a result, it’s possible to mix and match different types of finance, including short, medium, and long-term financing solutions, and use an array of assets as security.
Today, property development finance is often used as a blanket term for many different types of funding. However, these are the two main financing categories:
Purchase Finance
Most development projects require you to purchase a commercial or residential property before you can develop it. Purchase finance covers the first part of this scenario, helping you finance the initial real estate purchase. In most cases, your lender will give you a percentage of the purchase cost of the property or land. It will be up to you to cover the remaining amount. Lenders opt for this approach because it motivates developers to keep the project running on time and on budget, given that a significant amount of their own capital is tied up in the project.
Project Finance
Generally, lenders will release the cost of the development of the property in defined stages. This is particularly true for large projects, but if you have a minor renovation or development that’s low risk and doesn’t have lots of different stages, lenders can sometimes be open to releasing funds all at once.
In all other cases, funding is released in phases: finance for phase two won’t be released until phase one has been completed and so on. Your lender will also inspect each phase and formally sign it off before funds are released, so the process isn’t instantaneous, and you will need to factor it into your planning and cash flow projections.
Again, lenders adopt this strategy to reduce risk. You and your lender are partially protected if your development project fails because you hSaveave only received a portion of funds, and the closer the project comes to completion, the less likely it is to fail. As a borrower, you are also motivated to keep the project moving and on budget.