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There’s a common misconception among property developers that securing development finance means stumping up a large cash deposit.  This was certainly true when the big banks dominated the lending market, but now a broader range of borrowing options have opened up, so has the scope to make your equity work harder.

You’ve heard the expression there’s more than one way to skin a cat? Well, there’s definitely more than one way to secure a debt.  In our last blog, we looked at how to structure your capital stack to optimise your equity.  Here’s four more of the smartest ways to keep hold of your cash and still land the development finance you need.


Consider a second charge

It may sound obvious but look to leverage other assets before you reach for your wallet.  Second charge loans allow you to use equity in a commercial property or piece of land as security for another loan, despite having an existing mortgage.  We recently helped a developer client that had a BTL portfolio who was looking to access equity for a deposit, without losing the favourable rates he had secured on his mortgages prior to the 2008 crash.

There was an opportunity cost to the client of not being able to access his equity, but there was also a real financial cost in releasing the money.  We were able to arrange a bespoke revolving credit facility secured on a second charge basis across 11 properties. He then used the equity for a deposit, meaning he wasn’t required to use any cash for his deposit, and in fact, it was a 100% cashless deal.


Leverage the planning process

If you buy or option a site without planning permission, you will add value during the planning process known as ‘sweat equity’.  This type of investment measures time and effort put into a project.  Securing planning permission is time consuming and arduous work, so good lenders will take this into account when assessing a loan application and lending opportunity.

Every lender will take a different view on the value of sweat equity, so as always, our advice is to shop around and find one that truly sees the value you can add as an experienced property developer.

We recently helped a client who purchased a mixed-use site for £1.7m, with outline planning for a knockdown and rebuild. He needed help to fund the £510,000 plus costs required to purchase the site but knowing the value would increase through the planning process, he wanted to avoid an investor contributing a small amount of equity but taking a profit share on the full scheme. We arranged a bridging loan to acquire the site and then raised enough debt in the development loan phase to repay the investor when we replaced the bridging loan with the development loan, before the project was finished. Read the Case Study here. Through adopting this approach, our client was able to retain an additional £1m in profit.


Use external equity wisely

If you need to raise money from other investors to make a scheme happen, don’t be too generous with your profit share. Remember you’re the linchpin of the project and without you the development wouldn’t be on the table, so be mindful when assessing your finance options. If you buy during the pre-planning phase, it’s also possible to repay your equity when you raise the development finance for the build stage, so you’ll only need to pay your investor a percentage of the profit on the uplift during the planning process, not on the full profits of the scheme.

To put some numbers to this, here’s a worked example. Developer A borrows £5.5m from a high-street bank at 5% interest, based on 55% LTGDV on a Gross Development Value (GDV) of £10m. The total costs of the scheme are £7.5m (pre-finance), leaving the developer with £2m of equity to find. The developer has £1m, so needs to secure the rest from an investor. After the finance costs are added, he makes £2m in profit, but has to repay the investor his original £1m, and share half the profits from the remaining £2m. This leaves £1m of profit for Developer A.

Developer B shops around and finds a lender who offers a slightly higher rate of 7.5%, but a LTGVD of 65%.  He therefore needs only £1m of equity, which he already has, meaning there is no need to find an investor or offer a profit share, making his profit £1.75m (after finance costs), rather than the £1m earned by Developer A.


Request a deferred land payment

One of the lesser known tricks of the trade, but a useful one to have in your development arsenal, is a deferred land payment.  This is where a developer wishes to buy a piece of land, and the land owner agrees to receive part of the payment once the properties have been built and sold (potentially at a premium for the benefit). The lender providing the development finance has first charge over the land and lends all of the build costs, plus a portion of the land acquisition costs.

The buyer gives the lender security over a site that is worth more than they have paid for it (so far), thus de-risking the lender and allowing the buyer to access greater value projects with smaller deposits. It is common for the landowner to request a second charge behind the lender, and the landowner can only be repaid after the lender, as per the loan agreement.

Not every lender will agree to this type of lend, and if they do, every lender will take a slightly different approach, so this is a case where you will need to seek expert advice from a broker.

In practice, it could look something like this. A client agrees to buy a piece of land for £800,000. The land owner agrees to take payment of £500,000 now and £300,000 when the properties are built and sold. The lender is happy to lend £300,000 on day one against the land, which would normally mean the borrower would have to find a deposit of £500,000 plus land transaction costs. However, if the lender is happy to use the deferred land payment, then the borrower only needs to pay £200,000 plus costs, meaning a huge reduction in the required equity.

So, what are our key property finance hacks when it comes to funding your next development? Weigh-up whether your existing assets could help secure a second charge, know your worth when it comes to sweat equity, shop around to ensure profit share is a last resort, and don’t forget a deferred land payment could well be an option, and a good one at that.


For more advice on securing the right finance for your next development, please give us a call on 0207 846 0184 or email info@propertyfinancegroup.com



October 2019