How site acquisition finance can help you save money when you have the basic knowledge before applying for development finance.
Development finance is an enormously powerful tool that enables businesses to ensure their projects start on schedule. In the highly pressurised world of property development timing is everything, and developers who can keep their projects on track and on budget are able to turn a handsome profit; those who can’t may well end up with a costly failure. The most crucial part of any project is the opening phase - while any refurbishment, construction or renovation project must be carefully managed at every stage, the beginning of any endeavour has the largest number of obstacles to overcome. A major hurdle for property developers is the need to secure a suitable site before building work can begin, which can often be difficult to achieve, because acquiring the necessary funds to get the ball rolling is a major obstacle and can easily prove to be a stumbling block for inexperienced developers.
The use of development finance to enable the escalation of construction projects is widespread, and bridging finance is a critical element in enabling property developers to move forward. Many developers make use of this type of finance, but it’s important that anyone considering a loan of this nature carefully considers their options before committing to it; as with any financial product, development finance can be costly if handled inappropriately. For this reason, prospective borrowers should consult a financial advisor before making any commitments, in order to guarantee that development finance is the correct solution for their situation.
A major problem for property developers is the inflexibility of mainstream financiers. Banks are rarely able to provide funds in any but a narrow set of situations, and in many cases a developer might need to acquire funding for projects which don’t fit these strict criteria. Developers need to secure funding in a wide variety of different areas to meet the demands of upcoming projects, and a significant purpose for which they need funding is to secure building sites before construction can begin. While the main costs of construction may be more to do with the building itself rather than the site, the costs of purchasing a suitable site in a desirable area can be substantial.
The key to successful property development is to stay flexible, which means that property developers can never over-commit to any of their developments. The more capital they sink into a project the harder it is for them to remain financially adaptable, and an inability to react to changing circumstances can prove fatal to property developers. By seeking development finance to help secure a site and jump-start development, property developers can minimise their commitment to any one project whilst still keeping each development on track for success.
It’s fairly common for site acquisition finance to be part of a larger bridging finance deal; since many property developers will also use development loans to escalate the later phases of a project as well, they often source a site acquisition loan from the same lender. This smooths out communications and makes for an easy all-in-one financial solution, but it’s not the only way to secure a site purchase loan. Many lenders will provide standalone site acquisition finance to clients in need of a top-up, or who have alternative sources of finance already in place for a property’s development.
Like all forms of bridging and development finance, a site acquisition loan is only designed to exist for a limited amount of time. These types of loan are short-term secured loans, and are used to fulfil a specific purpose; once this purpose is completed, they must be repaid along with any outstanding charges and interest. A significant part of any site acquisition loan is the “exit strategy” that the borrower uses to complete the loan - the borrower’s exit strategy forms part of their initial loan application, and development lenders will consider their strategy’s viability when deciding whether or not to approve the loan.
The most common form of exit strategy for a site acquisition loan is through refinance. Site acquisition is itself a short process; once the land has been purchased and work has begun, a development finance deal is used to fund ongoing work. Often, this development finance package will include sufficient capital to repay the initial site acquisition loan, unless of course the borrower is using the same lender for the entire project. In this case, the site acquisition portion of the loan will be subsumed into the overall package, which will be repaid at a later date. Usually, the developer will either sell the property or seek a mortgage in order to repay their outstanding loans at the end of the property’s construction.
Property development is one of the most competitive sectors in the UK, where large profits and huge developments bring major players together. In this pressure-cooker situation any edge over the competition is invaluable, and the importance of moving swiftly to secure opportunities cannot be overemphasised, because the early bird always gets the worm. Site acquisition finance enables developers to move quickly when necessary, because these lenders can work within exceptionally short time spans. It’s not uncommon for a loan application to be completed within just a few days, and for funds to be available a week after first contact. In fact, when push comes to shove there’s very little that development lenders cannot achieve; when a project must be saved in 24 hours, there are always lenders that can rise to the challenge.
The speed at which these lenders work is possible because they’re often small, highly specialised teams. These lenders can capitalise on their short lines of communication to provide decisions quickly, and can construct completely bespoke lending packages that suit the needs of each individual borrower; for instance, interest and arrangement fees can often be “rolled up” until the loan completes, enabling borrowers to minimise their ongoing monthly payments until they repay the loan. The swiftness and security that site acquisition finance brings to the property development sector is vital for enabling profitability and stability in this ever-growing industry.
A bridging loan is a short-term loan secured against property. It allows you or your business to “bridge a gap” until either longer-term finance can be arranged, or the underlying security or other assets can be sold.
Development finance can be used for new build projects, commercial and residential developments, renovations, conversions or for the redevelopment of existing properties. Loans can be used for a vast range of different property types.
Experienced developers, some of whom rent out completed properties, often use property they already own within their portfolio to secure lending. With enough equity in an existing portfolio finance can be secured to buy more properties or land for future projects.
A development scheme is usually classed as finished when the developer has received the Practical Completion Certificates.