Case Study: Helping a Property Developer Reduce Costs
With Property Development Finance
Property development can be a highly profitable business. But it also mens high costs, and to achieve the potential a high scale of funding will be required.
At Rangewell, we recently helped fund a development that had run into problems - thanks to a combination of the pandemic and existing funding which was costing too much to repay. We found a loan at a far lower cost, ensuring that the project could go ahead and saving the owner from potential bankruptcy.
Property development is popular across the country. It can mean a high level of profits and those profits can be achieved very quickly, - with the right combination of property and project vision, and the right finance.
Finance is always key to the success of property development. The high cost of property in the UK makes investing in property difficult. Fortunately, there are solutions – property is one of the few sectors where it is relatively easy to borrow to fund an investment.
You can borrow to buy the property you wish to develop, and even borrow the cash you need to develop it.
Property development finance is a broad term that covers many different options, including various mortgages, business loans, and even unsecured personal loans.
If you have a load of money handy, you can use it to buy a property with no need for external finance. This could be a possibility as your development business starts to take off.
However, most developers will call in external funding, and include the cost of repayment in their project costing calculations.
Some smaller developers may be possible with a buy to sell mortgage which will let you sell a property shortly after buying it – something that can be difficult to do with a standard mortgage. Lenders prefer properties that are “habitable”, i.e. they have a working kitchen and bathroom.
Because of the need for a property to be habitable, most projects will use other types of funding, such as a bridging loan. Bridging loans are often used to buy a property, renovate it, and then sell, paying off both the interest and loan. These are high-interest loans that can be theoretically used for any purpose but must be secured against property. They are quick to arrange, and therefore particularly suitable for buying dilapidated properties at auction, when the full amount must be paid within 28 days of the sale.
However, for larger projects, a dedicated Property development finance product will be required. These are specialised loans for established property development companies and loans that cover heavy refurbishment. Acceptance and rates depend on your property development track record, and the strength of your business plan.
These are not intended for the newcomer-to-property. You’ll likely have a solid track record in property development, and be planning development activity that’s not covered by any of the other finance options discussed on this page. Most lenders will consider loans on a case by case basis, and set interest rates accordingly.
When large sums are involved, lenders have to be cautious. Even those who are prepared to fund whole developments may have a ceiling on the amount they can lend on a single project. Others may be reluctant to offer funding for certain kinds of development.
Those that will lend may require a high rate of interest.
Getting the deal you need for your plans - and turning your ideas into profits - requires expert support.
Without in-depth knowledge of the lending industry, it can be extremely difficult to find the lenders who can provide the most competitive rates for specialised funding such as Development Finance. At Rangewell we have the necessary knowledge.
About Property Development Finance
Property Development Loans are a type of short-term lending that, at the lower end of the scale, allows a developer to finance renovation or refurbishment of a domestic property. Larger development loans may allow the funding of large-scale development projects, including the build of entire new estates.
Ground-up development may be funded in a number of ways. The key point to remember is that his type of property funding is always arranged on an individual basis. For more extensive projects, more complex finance arrangements will be needed.
Lending for property development can include a roll-up of interest and associated costs into the loan, which would be paid off once the development is sold.
Lenders will often provide up to 60% of the Gross Development Value, or GDV, of a development project and may expect at least 40% equity of the GDV to be funded by the client with the acquisition of the site.
Funding will then be provided on a phased basis to cover the costs of development or re-development. Very large multi-unit block developments, however, may require pre-sale of each phase before funding can progress to the next stage of the project.
But if an experienced developer wants to buy a plot of land and build on it, a lender might finance 50% of the plot purchase and 70% of the build.
All property finance deals are arranged on an individual basis, and the lender will look closely at plas and the potential of a site as well as the value of the site itself. This can mean that shopping around for the finance you need is essential. Costs can vary widely between lenders.
Putting property finance to work
We recently helped a Midlands-based developer find a solution when his development - a refurbishment of an office building in a city centre, and its conversion into apartments ran into difficulties.
“I was certain that the location was ripe for a profitable development of luxury homes, and the numbers were looking good - but the problem blew up fast. I had acquired the property with what I thought would be the best funding I could get - it was from a lender I had worked with in the past. They wanted £7,500 a month in repayments and insisted on repayment and interest - which I knew was unusual in the sector, but I needed to secure the funding - which was more than £1.2 million fast.
I was paying an interest rate of close to 19%, but I did not believe that I had any choice.
I was ready to start work, and needed to get the project moving along fast - and that is when the problems began to hit.”
The first problem was the local authority, who had been quick to agree to outline planning permission for the conversion - without which he would never have taken the project on - but started to be more difficult when the time came to look at the details.
The developer provided detailed plans, only to have them rejected by the planning officer.
“The problem was in the details. The design features I needed to include to maximise the number of flats I could create would have changed the appearance of the block too much. It is not a listed building, but its position is prominent, and the council were insisting on an approach that respected the heritage of the site. I had new plans drawn up, which mean two fewer flats, but less change to the facade.”
But the revised plans needed to go to the planning committee, and that took valuable time, as well as new drawings from the architect.
The months were slipping past, and the payments were flowing out.
“Then, just as we started to see a light at the end of the tunnel from the planners with another revised design, covid hit. Lockdown should not have affected the building trade too much, but there was a lot of confusion about whether we were allowed to work or not, and what safe practices were.
The upshot was the site was completely closed for another month, and the insistence on safe social distancing as a working practice means that we could not work as quickly as we wanted to.”
The project was starting to run into problems, with an overrun on costs - caused mainly by the high cost of the development funding.
“It looked as though I was going to make a loss on the project - if I could go ahead at all.”
The project could not be sold on - the property market had ground to a halt, and there would be little or no interest in buying a project that had stalled at anything like the amount the developer had already paid for it. It looked as though he might have to walk away from the project - although this would mean losing the money he had already invested, and probably being pursued by the lender if he was unable to make any further repayments.
He was seriously considering bankruptcy as the only way out of his problems.
“I needed to find a better way to fund the project because if I could not I would lose everything. I should have been able to arrange funding from another lender. But the problem was that thanks to Covid, most lenders were simply not lending. The only lender I could find who was interested was only prepared to offer funding at a higher rate than I was already paying - and even then, they were reluctant to offer as much as I wanted.”
He realised that he needed expert help if he was to find the funding he needed and contacted us at Rangewell.
Our property experts looked at the deal that the client was wanting to save, and saw that his project was, in fact, still very viable.
We knew that many property development funders had shut up shop until the post-Covid future became much clearer - but we did know of one that might be interested and still prepared to lend.
We approached them with full details of the project.
The deal we arranged
We were able to negotiate funding at a rate of 6.9%, substantially lower than the developer’s existing lender, and arrange it as an interest-only monthly payment.
This meant his repayments fell from £7,500 a month to just £2,500 a month.
“The new funding meant that the project was viable again. exactly what I needed and we started work immediately. It looks as though we were right about the desirability of the project. It won’t be the most profitable project I have ever done, but thanks to Rangewell, it will be profitable - and in the current climate, I can’t complain about that.”
Why we were able to help
At Rangewell, we work with all the lenders in the UK market, and not only do we know which are most suitable for a particular type of deal or a particular sector, we know those that can offer the most cost-effective solution for an individual need.
Our team includes experts in Property Finance, and our service is personal. |It lets you talk to a property funding expert who understands your challenges sector to find a solution that is planned around your business needs.
We will discuss your plans then call on our network of lenders, which includes virtually every name in the UK market, to get the funds you need quickly.
And when the solution requires going the extra mile and out of the box thinking - you can rely on us for that too.
Just call us and one of our experts will be able to discuss your options and work out the most cost-effective ways to provide the funding you want - whatever the challenge your business plans present. And, in most cases, our services are absolutely free.
To find out more call the Rangewell Property Funding team for an informal discussion on 020 3318 2613 or email firstname.lastname@example.org.
Property deals cost less with help from Rangewell
- Individual arrangements tailored to your circumstances
- Adverse Credit – no problem
- Repayments geared to your revenue stream - including interest roll-up
- Understanding the funding challenges for your sector
- Personal service
Talk to Rangewell – the business finance experts