When your development project is only halfway done, chances are, it’s not going to pass the test for development exit finance.
Perhaps you have run low on cash, due to cost overruns, leaving you with not enough in your pocket to complete the remaining tasks. Or maybe, you were counting on the profits from sales to drive your project forward, but those sales are yet to materialise.
For those projects that have hit a speed bump and are racing against the clock on their existing development finance agreement, there’s a lifeline available – a Finish and Exit loan facility.
This can be a game-changer, offering developers a new lease of financial life, access to extra funds, and an extended timeframe to sell the remaining units once they’re ready.
What is development finance?
Property development finance is used in the early stages to acquire a site or building, which will then be developed.
It is a type of short-term loan specifically designed for developers and property investors to fund building projects such as new builds, renovations, or conversions. The loan covers a large part of the construction costs, land purchase, or both, with the funds released in stages as the project progresses.
The loan is usually structured so that the interest is rolled up, meaning that there are no monthly payments to worry about. Instead, the loan, along with the accumulated interest, is repaid at the end of the term, typically when the project is completed and either sold or refinanced with a longer-term mortgage.
How much can you borrow?
The amount you can initially borrow with development finance depends on several factors including the nature of your project, the estimated costs, the potential value of the completed development (known as the Gross Development Value or GDV), and your experience as a developer.
Typically, lenders are willing to fund up to 60-70% of the land purchase price, and up to 100% of the build costs. However, the total loan usually won’t exceed 70% of the GDV. This means if you’re planning a development where the end value is projected to be £1 million, you may be able to borrow up to £700,000 overall.
It’s important to note that these figures can vary between lenders and based on the specifics of your project. Loan amounts can start from as low as £100,000 and go up to many millions for larger scale developments.
Lastly, remember that each lender has their own criteria, and terms can be negotiated based on your unique circumstances. It’s always a good idea to engage the services of a property finance broker to help you navigate the process and secure the best terms for your project.
How is finish and exit development finance different?
Finish and Exit Development Finance is a beacon of hope for property developers when a project has exceeded its budget or timeline. Such projects usually don’t pass the criteria for typical development exit finance as a significant number of the units may still be works in progress, or perhaps not even begun.
This type of finance is accessible for projects that are yet to reach practical completion, with no necessity for them to be completely weatherproof.
In situations like these, the existing finance lender may not be pleased with the overrun and might demand a full settlement of the loan.
Here’s where Finish and Exit Development Finance comes to the rescue, supplying the cash needed to pay off the current lender and then finance the project until its completion.
How does it work?
A Finish and Exit Development loan acts like a short-term bridging loan, enabling a developer to clear their outstanding development loan. Moreover, it injects additional funds and time, allowing the project to reach completion.
Delays are often unpredictable, and some lenders may be reluctant to extend loan facilities or offer the necessary flexibility.
In essence, it’s a switch-over to a new lender.
The usual loan term will span 12-18 months, and it’ll operate on an interest-only basis.
The loan facility will stay in place until the exit strategy is accomplished. This will be either:
- Selling all of the units
- Refinancing to a longer-term mortgage once fully completed
At this stage, the lender will expect the loan to be fully repaid, inclusive of any accrued interest and charges.
Who can borrow?
Individuals
An individual is a sole person applying for a loan. Whether you’re a seasoned property developer or a first-timer, as an individual, you can apply for Finish and Exit finance to help complete your project.
Partnerships
Partnerships consist of two or more individuals or entities who’ve joined forces to undertake a development project. These collaborative ventures can tap into Finish and Exit finance when they need a financial boost or extra time to complete their shared project.
Limited Companies
A limited company is a type of business structure that’s legally separate from its owners. Limited companies, whether they’re long-established or start-ups, can apply for Finish and Exit finance. This can help ensure the company’s development project doesn’t stall due to lack of funds or time constraints,
Special Purpose Vehicles (SPV)
An SPV is a legal entity created solely for a specific purpose, often for property development. These entities are typically established to isolate financial risk. An SPV can apply for Finish and Exit finance to secure the necessary funds or time to complete a project,
LLPs
A Limited Liability Partnership (LLP) is a type of partnership where all partners have limited liabilities. LLPs involved in property development can apply for Finish and Exit finance to give their projects the financial backing and time they need. This can be a lifeline, ensuring the project’s completion without putting undue financial strain on the partners.
When is finish and exit development finance needed?
Often, a developer will rely on development finance to get a project off the ground, then shift to more affordable exit finance as the project edges towards practical completion.
Finish and Exit Finance steps in to support developers who haven’t quite reached the exit finance stage but still need either more time or more funds.
You can use it for:
- Refinancing an existing development finance loan
- Additional funding for projects on the cusp of completion
- Gaining extra time to wrap up the build and then sell
Your project doesn’t have to be watertight, but construction needs to be well on its way. At this stage, warranties and sign-offs are typically not available yet.
Acquiring a site
There will be occasions where a developer either cannot obtain further finance, or is not able to continue building a partly finished site.
They may then look to offload the project by putting it up for sale.
While these are invariably complex scenarios, they can be financially rewarding for an experienced developer.
A finish and exit loan could be used for the purchase and then further tranches released as the works progress.
Main benefits
A Finish and Exit loan brings with it several benefits that can provide a lifeline to developers who find themselves in tricky situations.
Here are the key benefits:
- Continuation of the project: The primary benefit is that it enables the completion of the development project. When additional costs and delays arise, it can provide the necessary funds and time to ensure the project doesn’t stall or collapse.
- Reduced borrowing costs: Since a significant part of the project is already completed, the risk for the lender is reduced. This can often lead to a lower interest rate compared to the initial development loan, reducing the overall cost of borrowing.
- Avoidance of penalty fees and interest: Developers can avoid the hefty penalty fees and additional interest that can accrue if they default on their existing development loan due to an inability to repay it on time.
- Additional funding: The loan can provide the extra capital needed to overcome unexpected costs, helping to keep the project on track.
- Extra time for marketing and sale: With the breathing space afforded by the Finish and Exit loan, developers can take the time to properly market their project and secure the best possible sale price for the units, rather than rushing to sell them at a potentially lower price due to financial pressure.
In summary
Finish and Exit Development Finance is a useful option that provides a safety net for property developers, ensuring projects that have overshot their budget or timeline can still cross the finish line.
Whether you’re an individual, a partnership, a limited company, a Special Purpose Vehicle (SPV), or a Limited Liability Partnership (LLP), this type of loan can be a lifeline, offering additional funding and time to complete your project.
From refinancing existing loans to providing additional funding for near-completion projects, Finish and Exit Finance opens the door to numerous opportunities. It helps dodge penalty fees, reduces borrowing costs, and provides extra time to market and sell your units, essentially smoothing out the journey from development to sale.
Ready to explore your options?
If you’re just about to start a new mortgage journey and could use the guiding hand of a professional, don’t hesitate to reach out to a reputable mortgage broker.
An independent mortgage broker can access over 100 lenders on your behalf. They will make the process smoother and more profitable than going it alone.
Keep reading, keep asking questions. The more you know, the better decisions you can make.
