Pre-development Finance

Pre-Development Finance to Make the Most of Market Opportunities

Residential and commercial property development is an ever-evolving business. Over the years, all the stakeholders in such projects – from developers to lenders, and buyers to investors – have found numerous ways to make sure that they end up bagging profits.

However, as things stand, it’s the developer who bears the most exposure to market risks. These risks make their presence felt through the life of every property development project. More peculiarly, some projects have to confront these risks even before the actual development begins. In such cases, obtaining planning permission in order to secure Development Finance proves to be a difficult endeavour. Pre-Development Finance offers a unique set of solutions in such scenarios.

What is Pre-Development Finance?

Pre-Development Finance is an external financing tool. As far as features go, it sits somewhere between Development Finance and a regular business loan. However, to treat Pre-Development Finance as such may not suffice.

We have discussed at length here what it takes to secure a suitable development loan. It’s clear that to finance your property development project, you need to have a detailed plan of action with requisite planning permission in place. But that, in many cases, isn’t easy. Some development projects are born out of uncommon but potentially lucrative market conditions that may not last for too long. To take advantage of such conditions, developers need to act fast. Thus, a conventional development loan becomes a foregone conclusion. Pre-Development Finance can address the financing requirements of such projects.

Example

Let’s consider a practical example to see how Pre-Development Finance can help certain property development projects.

An experienced commercial property developer has recently come across a development opportunity. A block of 15 commercial office units has been put up for auction by a consortium of investors. While the reasons for the auction are unknown, it’s been made clear that the property carries no outstanding liabilities. Since the developer is already invested in another project, it’s rather difficult for them to raise enough capital to purchase the property via regular mortgages or auction finance.

To counter this problem, the developer decides to go with Pre-Development Finance. The lender agrees to get involved in the project by buying a 60% stake in the still-undefined development project.

This loan allows the developer to purchase the property. In favourable market conditions, the developer can obtain the necessary planning permission, go ahead with the construction and settle the Pre-Development Finance package by borrowing from another specialist development lender. Thus, the developer manages to bypass the problems posed by the lack of planning permission and exit strategy by securing Pre-Development Finance and offering a potentially premium share in the profits to the lender.

Notable Features of Pre-Development Finance

Pre-Development Finance, being a one-of-its-kind financing product, offers some unique features to borrowers. These are noted below.

• No upper cap to the loan amount (starting from £100,000)
• Loan uses the property as the primary security
• Swift Decisions, fast disbursement
• Flexible loan terms (6 to 9 months)
• Development Finance to expedite the purchase or lease of commercial and residential properties
• Option to settle upon obtaining planning permission
• Pre-Development Finance up to 65% of projected GDV available
• Option to add on a conventional Development Finance package post-planning
• Option to exit via a bridging loan
• Option to redistribute the equity stake and add capital in order to convert Pre-Development Finance into Development Finance
• Affordable interest rates

Please note that some lenders may choose to offer Pre-development Finance contingent on receiving planning permission.