Do you understand fully how your development finance facility will be split into tranches?
Read further on the specifics behind development finance funding releases before you apply
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How Development Finance Fund Releases Work
There's a great variety of property development finance, but it's used to fund building or upgrading of properties in most instances. Therefore, it operates differently from a standard mortgage or loan, in which the money is released in phases as the construction continues.
Here we explain the key aspects of staged releases and withdrawals and what you can expect from your development finance loan.
How Much Of The Development Finance is Released on Day One?
Lenders will set a limit on how much they will lend the developer before work begins in many cases. This is often the funding required to purchase the land or property for the development. Many lenders offer up to 70% of the site's value, with interest payable from the drawdown date.
It is possible to borrow as much as 100% of the development's construction costs, but you will need a deposit to cover the purchase price if you do not already own the land or property.
It is critical to pay attention to other costs, such as exit fees and contract charges in addition to the interest rate when considering development finance products that cover a large percentage of the costs.
How Do Staged Payments Work in Developer Finance?
The development finance is divided into tranches and distributed at predetermined phases during the construction procedure, after which it is signed off by the lender and developer.
A monitoring surveyor verifies when a certain milestone has been reached (for example, completing the foundation or weatherproofing the house). As the work is completed, the monitoring surveyor keeps track of progress and ensures the project stays on schedule.
If any concerns arise during the construction process, these issues are conveyed to the lender and developer in order to solve them or adjust the planned drawdown dates.
On bigger projects, a dedicated surveyor visits at predetermined times, or a regular surveyor may visit the site and report on progression. In advance, you agree on the phases, so it will not be the case that you ask for more money and are rejected because you haven't completed a specific part of the job!
That's why it is crucial to include thorough costings for your development project in the initial application and decide on essential stages where it would be necessary to request a valuation, followed by a new drawdown of cash to finance the next steps.
How Important Is Cash Flow Management in Development Finance?
The most significant cause for developers failing is poor cash flow management, so it's crucial! Financing is often provided after a phase of the job has been completed, as well as the deposit for the remaining site purchase cost.
You must keep track of how the development is progressing and whether the costs are in line with expectations.
How Do I Keep on Track Of My Costs and Build Schedule?
The first step is to create an extensive project schedule and a budget listing the expenses for each development component.
Lenders will need to see these plans before lending and understand that some parts of the schedule will require a higher proportion of funding.
You can streamline the accepted stages to match your budget and timetable rather than waiting for the next stage. During some phases, the funds are available only in set quantities, distributed equally throughout the project.
You must carefully assess the costs if this is the case. You might encounter cash flow difficulties at critical phases where you need more funds to cover the expenses.
Conversely, you might have months where the project is less expensive and costs less than what you have an interest on unused funds and incurs interest as a result.
What Are The Typical Drawdown Stages on A Development Finance Project?
Every project will require a unique approach, so there is not one specific number of phases. If you use development financing to finance a small-scale renovation, you will receive all of the facility in one lump sum once the project begins. More frequently, you will boost, redo, or build a bigger structure, so your payments might be divided as follows:
When the contract is done, you will receive the first payment. If you are seeking financing to buy a property or plot of land, phase one begins with this.
Phase One is complete once the inspector verifies the work is finished. Once the inspector has visited and assessed the work, phase two may begin. Timbers for the roof are included in Phase two, and a valuation visit is required before the lender signs off on funding tranche three.
A property's water tightness may be achieved through glazing, roofing, and door installation in phase three. Once the interior decor is finished, the final payment is sent to the borrower.
Some projects take multiple phases to complete, resulting in retrospective funding. In these situations, you would be responsible for paying for the work upfront and then receiving a drawdown when the lender was pleased with the progress. Other developments are simpler and have just one or two phases, so this is only a rough indication rather than a standard approach.
It is best to avoid drawing down any more funds than necessary for your current development work, to prevent paying extra interest than necessary.
When your development is finished and all funds have been released, you will begin paying interest on 100% of the development finance facility, which is usually charged monthly.
At this moment, the priority is to initiate your exit strategy so that you can repay the development finance as quickly as possible.
Further Reading
Disclaimer
This article is intended to provide a general understanding of the topic. The contents should not be treated as advice.
Accelerated Finance Limited only considers applications for commercial or investment properties. Accelerated Finance Limited is not regulated by the financial conduct authority and only provides unregulated loans via our network of lenders. Your property is at risk if you fail to make payments on a Mortgage Contract.
Please note that Accelerated Finance Limited and its employees do not give financial advice or recommendations on any product.
