How_to_Finance_a_Property_Development_Project

How to finance a property development project Whether you are thinking about property development for the first time or you are an experienced developer looking for some new ideas, the financial basics are always the same. To make a profit the developer must: 1. Understand all the costs involved in both the acquisition and build phases, 2. Accurately assess the potential sales price and 3. Manage the finances to project completion. Calculate and understand the total costs It is essential for any development project that all the costs are clearly understood before purchase or embarking on the build phase if the site is already owned. Land/building acquisition price This is the total cost of purchasing the building and/or land Build or refurbishment costs The total cost of all materials and labour involved in the build or refurbishment phaes Stamp duty Stamp duty is payable to the government at the following rates: Up to £120K   0% From £120,001 - £250K  1% From £250,001 - £500K  3% From £500,001 and above 4% Professional fees Professional fees will probably include the services of a solicitor, architect and surveyor and possibly the services of your lenders quantity surveyor Finance costs Finance costs include the cost of any: • Residential or commercial mortgages required to purchase the development site • Development finance required for the build • Interest charged on the finance either rolled over the total project or payable on a monthly basis • Finance deposits required for acquisition and development finance Contingency costs Development project costs can very easily be underestimated or can escalate due to unforseen problems. For this reason it is very sensible to include a contingency cost that can be used if the worst happens. Contingencies estimates can vary between 5 and 25% of total project cost depending on the degree of complexity and risk involved with your project. Total Costs Until all of the above costs are known and accounted for it is impossible to accurately define the profit potential from a development project. Assess the profit potential Property development is crucially about adding value to a site and either selling at a higher price level or completing the site and holding for longer term investment purposes. So how do developers assess the potential profit that can be made from a development site or project'   Estate Agents Estate agents can play a useful role in assisting the developer to assess the profit potential from a completed project. It is important to remember that the agent’s opinion will not count toward finance raising or when your propsective purchaser is deciding whether to part with his hard earned cash. However they can be extremely useful in making quick assessments of the potential of a site before deciding to part with fees for professional valuers and surveyors.    Do your own comparables As well as working with the local estate agents it is important to do your own research so that you are very clear of your target market and the possible price your site could reach compared to similar property and location types. Professional valuations Ultimately the finance that you are able to raise will depend upon the professional opinions of a valuer or surveyor. Lenders need to protect themselves from overinflated estimates and will rarely provide development finance until they have an up to date valuation of the current site and an analysis of the likely post development value. Evaluate your financing options Financing options range from total self financing where the site is already owned by the developer and the build costs are available without the need for finance to total 100% development finance involving GDV, 100%, Mezzanine or Equity Finance routes. Residential Mortgages Some developers are either already living at the development site or plan to as their main residence. This is usually the lowest cost option but often the most troublesome to manage due to the difficulties of living on a building site. However residential mortgages make no provision for the costs of development.   Finance for build costs If the developer is already in possesion of the site then traditional bank lending for development finnace can range from 50 to 70% of the total required depending on experience and status. Traditional acquistion and development finance Traditional bank lending varies from 50% of acquistion cost and 50% of build costs (50/50 financing) to 70/70 financing for experienced and professional developers. This type of traditional high street bank development financing is usually provided at the best rates due to the relative reduced risk to the bank. Non traditional development lending There are an increasing number of 2nd tier property lenders willing to provide higher loan to value (LTV) multiples than the high street banks for both experienced and novice developers however it comes at a cost. Finance of this type tends to be provided at approximately bridging finance rates of 1.5% per month and multiples of between 50/75 - 70/100 depending on experience and lending criteria. GDV financing and 100% finance Both of these financing options are available to experienced and sometimes novice developers. See How to raise 100% development finance Mezzanine/Equity finance Mezzanine and Equity finance are usually only available to experienced and professional developers. These facilities involve using other investors money to bring primary finance to the deal when deposit money is not available from the developer. Manage and track the costs It goes without saying that it is one thing to understand clearly the costs involved in a development project and another to keep them to budget.The more research that is completed in the early evaluation phase of the project the more likely that planned project costs will be delivered. Fixed price build contracts can be a very useful way to manage the potentially spiralling costs of property development.