Getting a good development finance deal begins with building an understanding of the different types of development finance available. Something your broker will discuss with you at an early stage in order to help you find a suitable product.
Development finance is available in a variety of forms, and the associated jargon can be quite confusing. Detailed below are just a few of the most common terms you are likely to encounter when applying for development finance, with briefly summarised explanations for each.
Senior Debt Development Finance
This refers to the first charge against an asset, which usually covers 100% of the construction costs and provides a proportion of the money needed to purchase the property. Senior debt development finance typically goes up to a maximum of 50% GDV to 65% GDV.
With senior debt development finance, no other debt has been secured against the asset (property or land) - the development is therefore issued as a first charge loan.
GDV stands for ‘gross development value’, which refers to the total development’s sale value when the work has been completed and all required completion certificates have been obtained.
Senior debt development finance in practice:
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A developer’s project has a GDV of £1 million with £300,000 construction costs
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Development finance is available up to a maximum of £650,000 (65%)
Mezzanine or Junior Debt Development Finance
Mezzanine development finance is issued as a second charge loan, meaning the development already has a loan secured on it. With mezzanine finance, the borrower can typically take their total loan up to around 80% of the project’s gross development value.
This is a popular choice for developers looking to cover as much of the project’s costs as possible with capital from external sources, rather than using their own on-hand cash reserves.
Mezzanine development finance in practice:
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A developer’s project has a GDV of £1 million
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Senior debt development finance has been obtained at 65% (£650,000)
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Mezzanine finance is taken out at 15% of GDV (£150,000)
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The developer’s total lending amount against the development increases to 80% GDV
Stretched Senior Debt Development Finance
This is a specialist product that enables developers to borrow to the value of senior debt development finance and mezzanine finance combined. Stretched senior debt development finance is usually available up to a maximum of 70% GDV or 80% GDV.
As only a single valuation and one set of lawyers are involved in arranging stretched senior debt development finance, it can be a quicker, easier and more cost-effective option than taking out two separate loans.
Super Stretch Development Finance
Super stretch development finance enables developers to apply for as much as 90% of the total project costs in the form of a single loan.
This again is where the first charge senior debt finance and mezzanine finance are combined, and is a popular choice among professional developers looking to improve cash flow and execute multiple simultaneous projects.
For more information on any of the above, or to discuss any aspect of development finance in more detail call anytime for an obligation-free consultation.
Author: Craig Upton
