What to think about before you apply for development finance 

While property development hotspots and trends have fluctuated over the past few years as the impact of the pandemic and – more recently – the cost-of-living crisis has been felt, property development remains crucial to the UK economy.

Development finance is invaluable when it comes to getting a project up and running, and there are many options available. Whether you are an experienced developer or just finding your way, it can be difficult to decide on the right approach – and it’s easy to make mistakes. To help prevent that from happening, Hodge’s head of business development for commercial lending and resident property development finance expert, Gareth Davies, shares his top tips when it comes to applying for development finance.

What are the most common mistakes people make when applying for development finance?

“Firstly, preparation is key. We do a lot of diligence up front, and we want to properly understand the transaction, the proposed development, the borrower and their strategy before we proceed.  It isn’t as simple as looking at a property or plot of land – we need applicants to provide insight into the project, so we can confidently assess the risks and lend with confidence. Ultimately, if you are looking to secure development finance, presenting a detailed application complete with all the necessary elements is essential.

“Experience is also an important factor, and it’s a mistake to leave this out of your application. Looking at a developer’s past projects and wider portfolio helps give us important context and makes your application much stronger. Some lenders – like Hodge – only lend to more experienced developers, so be sure to look at the lending criteria before submitting your application.

“Not being open and honest about your credit or media history is another mistake to watch out for. Lenders do extensive checks and will unearth any problems you try to hide, so being up-front from the start will save both you and the lender time and stress. In many cases, minor or very old problems might not affect your application if they are addressed at the outset.”

How much lead time do development lenders need?

“The amount of time your application takes to progress will depend on how prepared everyone is. If the borrower and/or broker has all the information that we are likely to require to hand, this will speed up the process to receiving an indicative set of heads of terms as well as speeding up the process to get to a credit application.

“At Hodge, we work very hard to try and ensure the time it takes to go from the credit application to the initial drawdown fits within an eight to10 week timeframe.  However, this is enormously reliant on the flow of information and the quality of that information from the borrower and any lawyers involved.”

How do you choose the right loan term?

“For development finance this is really important.  The developer needs to make sure they're confident they can deliver the property through to practical completion within the time period agreed within the loan, and most importantly, ensure they can also sell the units or refinance them should they wish to retain them for letting purposes.

“We always recommend erring on the side of caution for both the development term and the sales period at the back end of the facility, because there are a number of factors that can influence the completion date of your project. For instance, if lead times or availability to source supplies and labour change, then this will have an impact on your deadlines. 

“Often these issues are outside of the control of the borrower but it is the borrower who has to deal with them. A sensible contingency in term is recommended, regardless of how straight-forward you may expect the project to be.  Problems and challenges will no doubt arise. However, at Hodge we pride ourselves on working with developers through the good times and the bad.  We all want to succeed and this can only be done through completing the development – so this will always be our aim.”

Should planning permission already be in place before you apply for finance?

“Not necessarily. Sometimes property is purchased unconditionally and without a planning consent, with outline consent only, or with a full planning consent for a different use or not exactly what the developer is seeking to build.  While a full and correct planning consent will be required for development finance, Hodge can proceed with a land or property acquisition bridge where planning consent is not required.  Examples would include brownfield sites, properties that have an existing use, or properties with an outline consent. These could all be leveraged to assist the developer buy or refinance a site ahead of full development finance being provided – should they want it.

“Additionally, in England certain properties can be granted permitted development rights that allow a change of use and/or internal reconfiguring without the requirement for a full planning consent.  We have lent on a number of projects like this, and they can be extremely beneficial both for the developer and the local community, as it may result in a potentially derelict building being returned to a practical use and extending its life.”

Which kinds of development are easiest to finance?

“In many cases, it's less about the project itself and more about the people involved. Some developments, though complicated, can be approached with confidence because they're well planned, with seasoned developers.

“Over the years we've found the experience of the developer plays a major role in ensuring that things go smoothly. These are people who understand the challenges they face, even before the facility is drawn, and can very often resolve them quickly. An experienced developer will ensure they have the right professional team in place from the start, from their legal adviser through to contractor and an appropriate sale agent smoothing the way to a clean exit. In addition, when it comes to drawdowns, our project monitoring surveyor will be given everything they need on a timely basis. All of this ensures goals are aligned and developer and lender are working in lock step to achieve the end goal of completion and exit."

Looking to get your development project off the ground?

Find out more about our property development loans and get in touch with our experienced team at [email protected].