From housing developments to apartments and flats, the starting costs for residential construction can be huge. After land is purchased for a speculative residential development, a further injection of capital is required in order to actually get the construction project underway. In order to start building at the earliest opportunity and to see a return on investment as soon as possible, there are a range of advantages to securing development funding for residential construction.
At Onsite Finance, we understand the construction industry and work closely with our clients to provide comprehensive funding proposals to lenders, including high street banks and building societies, private banks, and specialist lenders.
What is development funding?
Development funding is a kind of financial aid that can be provided by lenders to support the high costs of building residential properties. It can be used to cover the costs associated with the construction of residential buildings, including buying land, drafting plans and construction labour and material costs. This funding can play an important role in ensuring that building projects are completed on time and to a high standard, to gain maximum returns.
The amount of funding that can be secured depends on a number of different factors, including the size of the construction project, the credit or the borrowing company, and any potential risk that lenders see.
The advantages of property development finance
In addition to helping cover the high costs of residential developments, there are a wide range of advantages to securing development funding:
- Development funding can offer more flexible loan terms compared to more traditional loans – this allows construction borrowers to tailer the loan around their needs.
- Development finance can provide as much as 60-80% of the project’s capital stack, which can be critical to the success of a large scale construction project.
- Funding allows developers to take on larger projects with potential for a better return on investment.
- Development funding can be repaid quickly once the construction is complete and residential units begin to generate income from sale or rent.
Depending on the residential construction project you have in mind, different funding options may be available.
Senior debt funding
Senior debt funding is a type of development financing where construction companies can borrow money and pledge some of their assets as collateral. Senior debt is the highest priority debt that must be repaid in the event that a construction company goes bankrupt, meaning that it is a less risky form of debt to lenders, compared with other types. Senior debt is usually provided by commercial and corporate banks, priced at lower interest rates, compared with other types of development finance.
In some cases, residential developers may be able to secure senior debt of as much as 55% of the gross development/resale value of completed residential units. Typically, this type of funding adds up to 60-70% of the total development costs, including land purchase, construction costs, professional fees, and interest.
Mezzanine finance
Mezzanine finance (or equity finance) is a hybrid form of funding that bridges the gap between loans (debt) and equity. It can be key to a construction business getting the capital it needs to complete a project, providing up to 90% of total residential development costs.
When used for property development, this type of funding can be used to cover costs associated with building, including buying land, materials and labour costs. If a business is unable to raise enough funds via a bank loan or investments, mezzanine finance can provide the additional capital needed. Mezzanine finance also provides flexibility for the borrower, with the funds being tailored specifically to their needs and financial situation.
Development funding with Onsite Finance
If you are seeking additional funding for a speculative residential building project, Onsite Finance can work with you to create a quality proposal for lenders, helping to increase your chances of securing the capital you need for your construction project.
As an independent, we can approach the whole of the lenders market to help increase your changes of development funding success.
