There are different funding models for property development depending on the size and ambition of the developer and type of project being proposed. Bridging finance is one of the tools commonly used by developers to achieve build success and on the right occasion, bridging finance can be the best ‘go-to’ option to pick.
When is the right time to use bridging finance?
Bridging finance can be used to acquire the asset as well as funding project costs for build or refurbishment. One of the great advantages about bridging finance is speed; it is far quicker to obtain than a regular commercial mortgage opening up opportunities to buy at auction and to buy repossessed properties from receivers, both of which require quick decisions and often depend totally on how quickly the developer can respond. With bridging finance, typically funds are available within two to three weeks.
Other advantages to bridging finance
Bridging finance is a blanket which is available for almost all types of property including the uninhabitable, the non-mortgageable and sites where there are legal or planning permission issues outstanding. For example, if a developer wants to snap up an empty office block, his intention is to convert the building into residential accommodation as it is situated in a prime city-centre location but planning permission is yet to be sought. The developer doesn’t want to miss the opportunity to acquire such a wonderful property but without planning permission in place and the refurbishment complete, there would be no real prospect of obtaining a mortgage on the building – this is where bridging finance can save the day. A bridging loan could not only help this developer acquire the building but once planning consent is in place, the same briding facility could be used to continue to finance the project providing the LTV (Loan to Value) remains at a defined level, usually 70%. Not only does the bridging finance facilitate the acquisition of the building but there are no monthly repayments throughout the course of the loan which can also assist with the developer’s cash flow.
Bridging finance can be used when a change is required to the legal title, a change which could take time, for instance, a large house purchased which is to be refurbished and divided up into residential apartments, or when the class of the building is being changed from commercial to residential or vice versa. Another wrinkle with bridging finance is that the loan advance is often based on the asset value rather than the purchase price so if the developer is buying under value say at auction, then they can often borrow more than a traditional mortgage would permit with the lower the price the more advantageous the financial situation if the property is obtained significantly below value.
What else is there to know about bridging finance for property development in the UK?
Mostly bridging finance is used in certain scenarios and these don’t usually include ground-up property development:-
- For the initial property or land acquisition
- To alter the legal status
- Where there are planning issues to be resolved
- Light, moderate and heavy refurbishments
Finance for what is termed, ‘ground-up’ property development tends to be sold as a separate product and is the province of specialist development lenders particularly in the central London market.
Interest calculations
Interest on a bridging loan can be treated in different ways by the bridging lender:-
- The lender may calculate the total interest that is required for the full duration of the loan – usually 12 months – and then deduct this figure plus their fees from the gross amount advanced leaving the developer with perhaps quite a lot less than the 70% they thought they were getting – the industry label for this is, ‘retained interest’
- Some lending organisations will allow this interest to be added to the loan and only deduct their fees from the initial advance, this gives the developer a much greater net loan from day one and allows the cash to go much further. The term for this is, ‘rolled interest’
- In quite a few cases, the cost of the refurbishment can be added to the loan even though the planning permission for the development has yet to be granted. The advantage of this is that the developer knows all the funds are securely in place for the project and will not have the additional time and hassle of making yet another application plus the fees this will attract. Once the consent or licence is obtained and in place then the bridging finance company will just release the funds allowing work to commence
Releasing refurbishment funds on a bridging loan
If refurbishment funds have come via bridging finance then almost invariably they are released in stages rather than one lump sum and, crucially, the release is in arrears not in advance. So the first stage of the work must have sufficient cashflow otherwise the project will grind to a halt. Once the first stage has been completed, the lender will arrange for a Monitoring Surveyor (MS) to visit the property to inspect the work and confirm the increase in value whereupon the bridging lender will release the first stage tranche payment. It is essential that the property value must always remain within the agreed loan to gross development value ratio at all stages, this is called the LTGDV.
How to find the best bridging finance deal for a property development
Two things should occupy the developer when he is searching for bridging finance and that is the best possible terms and fees from the lender and the maximum LTV. Many developers will use the services of a bridging finance broker who act as specialist intermediaries in this field. The reason why this is helpful is that every financier has a different portfolio and a different outlook on risk and location and type of asset. For example, some briding lenders steer clear of certain geographical areas and others won’t touch certain types of commercial asset; it can take time to work through different lenders to discover this, time the developer may not have whereas a broker will be able to instantly access companies which he thinks are already warm in terms of the type and location of the proposed development.
How much can a developer borrow?
How long is a piece of string?! Rather like domestic mortgages and then some, the amount a bridging company will be prepared to advance will depend on many factors including:-
- Whether the proposed development is residential or commercial
- The location of the site both in macro and micro terms so the town and then the precise location within that town
- The profile of the borrow so the lender will be looking at previous experience, credit status and background net worth
- The current status of the asset
- The ease of exit for the developer, will that be via sale or mortgage?
The maximum LTV tends to be a gross loan of between 65% and 75% with 100% refurbishment finance available in arrears as long as the GDV remains at the original level throughout the development.
How much will it cost?
There is no set pricing when it comes to bridging finance as most applications are looked at on a case by case basis but experienced property developers will have a feel for costs based on previous projects. Costs usually reflect the criteria used to assess the entire application, the level of risk involved and the inherent strength or otherwise of the project. A ballpark figure to consider would be 0.6% per month but this is only an average and could be subject to wide fluctuations in either direction depending on the deal. Aside from the monthly interest, you will also need to pay the lender’s arrangement fee, commonly around 2%, an exit fee depending on the risk profile of the transaction as well as the professional costs of the Solicitor, the lender’s Solicitor and any valuation costs for the site or building.
How quickly can bridging finance be arranged?
Completion of bridging finance depends on multiple factors such as the complexity of the refurbishment plan, the amount of legal work required amongst other things but an industry average would be three to four weeks. A good broker can help smooth and expedite the transaction and save a developer time both in terms of looking for the right financier in a constantly changing market and ensuring there are no delays in obtaining finance once the right lender has been selected.
What types of property can bridging finance be used for?
- Residential property
- Retail premises
- Commercial and mixed use property
- Land
- Industrial sites
- Offices
- Golf courses
- Hospitals
- Pubs
- Student accommodation
- Petrol stations
- Development finance
Whatever the project, there will usually be a bridging company prepared to finance it providing the application is sound and viable; the higher the risk, the higher the cost.
