Development finance is a specialised funding solution for experienced builders and developers. The funds are issued by lenders for the exclusive purpose of developing or refurbishing residential, commercial, and mixed-use properties.
Development finance differs from other types of commercial finance in that it is typically released in stages as the project progresses. In addition, lenders consider the projected value of the completed property, not just its value at the time of the application.
What costs are incurred with development finance?
Our online development finance calculator provides helpful insights into what to expect when applying for funding. Along with fixed or variable development finance rates (APR), as with most, if not all, finance products, there are various additional costs and commissions to factor in.
The most important of which are as follows:
Arrangement or facility fee
This is the initial fee charged by the lender for setting up the facility and to cover the administrative costs of arranging the loan. Arrangement fees vary significantly from one lender to the next, anything from 0% to 2%, and are normally added to the loan when the loan is agreed upon and the first instalment is made.
Due to the large standing costs involved in simply being a broker, it has become more common for brokers to charge a fee for the services they provide. Whether a fee is charged, the amount, and when the fee is due are things to verify with your broker before going ahead. In most cases, the fee can be added to the loan.
This is something like a deposit or insurance policy for the benefit of the lender, which may be payable before due diligence begins. Development finance specialists undertake a variety of operational costs, which must be considered. These are often covered in advance by way of a non-refundable ‘commitment’ fee payable by the borrower.
The applicant will also be expected to cover their own legal costs, even if the lender has its own in-house legal team that handles all pressing matters. Solicitors in general require an up-front payment before commencing their services.
The current and projected future value of your property (or properties) must be independently verified and presented to the lender. Typically, development finance specialists allocate surveyors they know and trust to perform valuations, though the costs are always covered by the customer.
This refers to the costs incurred by the lender of quantity surveyors hired to monitor the progress of the project at various stages. Development finance is released in instalments at agreed milestones as the project progresses, and this requires careful, continuous monitoring.
Lastly, lenders often charge an exit fee for development finance. This could be imposed by way of a commission on the entire value of the loan, a fixed fee agreed upon when the loan was taken out, or a percentage of the total value of the completed project.