Development Exit Finance
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Development Exit Finance
What is development exit finance? What’s the difference between development loans and development exit finance?
Development exit finance is a name that’s been given to a specific type of product. Development exit finance is really a type of bridging loan, specifically for when you’ve nearly finished a development and need some further borrowing.
It’s a name that’s just evolved, and more lenders are using this specific product name rather than just bridging loans, although that’s basically what it is.
With a development loan, you go in at the start and borrow some money based on the value of the land. In later stages of the build, the development exit finance can come in and give you a lump sum of money from day one to pay off your development finance. The loan will shift over to the new lender and they’ll give you some more money to finish the project.
How that’s structured will depend on how far through the project you are. If you’ve just got to literally plant some flowers, you’ll probably get that in one go. If you’ve still got to put kitchens and bathrooms in every property and decorate and landscape, you’ll probably get it in stages again.
It’s all quite bespoke, because the project stage will determine which lenders we can go to. I’ve done one recently where the client is halfway through – they’re not even watertight yet but another lender’s happy to come in.
What type of loan are development exit loans?
It’s basically a bridging loan, and what it does is reset your timing. You might be nearing the end of your 18-month development finance, but things have been a bit slow, you’ve fallen behind or things aren’t selling. An exit loan will reset the time, basically. You’ll have another 12 months to get the site finished and sold. It just takes a little bit of pressure off.
What types of property can I purchase?
That’s not really applicable in this case, because it’s not really about buying a property.
If you’re listening and that’s a question on your mind, go and check out the other podcasts that we’ve done about purchases.
It’s not overly relevant for a development exit, because this is not about buying properties. It’s refinancing – it’s like remortgaging your development loan.
Who can take out development exit finance? Do providers lend to first-time developers?
Anyone can take it out, but you do need to be a property developer with a project that you’ve been financing. As the name suggests, it’s an exit.
You’re already doing a development, you’ve got it to a certain point, and you need to come out of the finance that you’ve got for whatever reason. It’s not about starting a new development, because that’s just normal development finance.
You can get development exit finance as a first-timer. If your development is nearly finished, but you need some extra time or money, a development exit loan is probably right for you. Anyone can have it, based on what your development is.
I have had tricky cases where the current value of the development is nowhere near the GDV – the end value. The client has spent a lot and there’s a big loan to pay off currently, but the value of the site as it stands doesn’t support that. There are potentially things we can do there, but it depends on the site.
All of this depends on your development, the site, who you are, what you’ve done before, the project, how much work is left to go, who’s doing it and what costs are left. Have you had any pre-sales? Have you sold some plots off plan? All these things will shape the options and give a new lender confidence.
If you’re halfway through and the roof isn’t on, it can be tricky. Not impossible, but certain cases are easier to do than others.
Why should I look to take development exit finance?
It’s specifically because you’re running out of time or money and your current development lender is asking you to start paying the money back. That’s the point at which someone needs to give you some more money to get your project finished.
That generally is where the development exit lender will come in, or the bridging lender – because that’s effectively what it is. Not all bridging lenders do this, though, so that’s important to bear in mind.
In terms of why, you shouldn’t unless you need to. It adds an extra layer of cost in. You potentially have exit fees on your existing finance, plus set up fees for the new loan – it doesn’t come without its costs.
If you don’t need it, you shouldn’t do it. But if you run out of time, money or both, you probably do need it.
When is development exit finance used? When should I start looking for development exit finance?
Definitely start looking before you start getting into trouble – before the current lender starts saying they want their money back. We need to preempt that and have something else lined up.
It won’t ever be a surprise. You won’t get to site one day and suddenly you’re four months behind. If you know you’re falling behind and things are running over, talk to your existing lender. If they’re not being overly helpful, we can find another lender that will be. It’s right to come up with a plan sooner rather than later.
What costs do we need to consider when looking at development exit finance?
There will be costs. I won’t get into specifics but there will be a standard couple of percent as an arrangement fee, and you’ll be paying bridging rates. You may or may not have an exit fee, which depends on the lender.
You’re probably going to have some legal fees and valuation fees – the same costs you would expect when taking out a bridging loan.
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How much can I borrow with development exit finance, and how will my maximum loan be calculated?
Generally it’s calculated as a percentage of the development value. We’re not worried about your income, particularly. We’re focused on assets and liabilities.
How much is the site worth in its current form? Do we have any other security like your main residence? Have you got other property we could secure funding on?
The lenders that do this will take the charge on the development property, but if they can, they also take a charge on your property and on any Buy to Lets you’ve got as extra security.
If you don’t pay the lender back, they need a way to get their money, which is why they can spread their charge across different assets. Your assets will influence how much you can borrow.
If you’ve only got this one site, you might struggle to get as much as you need – but it’s so individual and bespoke to each project. It depends how far through you are. If you’re nearly at the end, the plot’s going to be worth a reasonable amount and that’s probably all right.
But if all you’ve got is a big hole in the ground, that’s not worth much. If it cost you £300,000 to dig that hole, that’s not an ideal position to be in. But this is the early days of development, not development exit.
Essentially, how much you can borrow depends on your assets, liabilities, your situation and the current development site. It will be calculated as a percentage of all of those things. We’ll add up all the assets and equity, and the lender will offer you a percentage of that – some now, some later. Bear in mind that some lenders are much more generous than others.
Do I have to make monthly payments?
Generally speaking, no. The interest works like a bridging loan – it will accumulate or roll up through the term and be paid off at the end. If you wanted to service it monthly, you could, but generally you’re taking this because you’ve run out of money on your site – so you’re probably not going to want to make a monthly payment.
What information would I have to provide for development exit finance?
Probably everything you provided for the development loan in the first place. Most lenders will want to see the planning documents and the latest monitoring surveyors’ reports, because your development lender will be monitoring it as you go through. They’ll want to know what condition it’s in. Details of your assets and liabilities are important, as well.
Will a valuation be required? How will my project be valued if it’s part complete?
Yes, a valuation is always required. This is where the majority of cases, in my experience, fall down – if your half-built site isn’t worth what’s needed to cover what you’ve spent on it.
That’s not true in every case, of course. But development exit loans are much easier at the end of the development process. The development will be worth more then. If you’ve got a development of houses or flats that are all pretty much done and just need finishing, so you’re 90% done, that should value up okay.
If you’re 40% done, it probably wouldn’t be. But if you’re that early on, it’s probably a bit soon to be thinking about development exit anyway.
What happens when I start selling the properties?
It’s time to celebrate, obviously! It depends on the lender, but they’re going to want their loan paid off. They have security over the site and as money comes in, they’re going to want it to repay the loan.
If you still need to finish some other plots, they’ll work with you to ensure you have the money to do that. They want that whole site to get finished as much as you do.
They’re going to want their loan to be reduced as properties start selling, but not at a detriment to you actually finishing the development.
How long does it take to complete?
It can be quite quick – if the lender’s happy with the initial figures and your plan, they’ll move to valuation. That’s the most important part of the process. If the valuation is okay, that’s pretty much it. There’s some legal work to do to take over from the old lender, but it can be done in just a few weeks.
What happens if I repay the development exit loan early?
That’s good. You won’t accumulate as much interest as you thought. It depends how early it is, but just watch out for penalties.
Some lenders have a minimum amount of time you hold the loan, where interest is due. Some might have an exit fee, as your development loan probably has. Ultimately, though, you can pay it off as soon as you like.
What are the advantages and disadvantages of development of exit finance?
If you’re running out of time or money on your development, you need this. There isn’t really much choice, unless you can find some money elsewhere. So the advantage is that it’s going to dig you out of a hole, potentially.
The disadvantage is that it doesn’t come without cost. It’s no more necessary than any other bridging loan or even development loan, but this sort of finance isn’t the cheapest. If you’re listening to this, you’re probably a property developer and you know that anyway.
How long does it take to arrange a development exit loan?
A few weeks, hopefully. There are more complicated cases that may take longer. I’m doing one at the moment that’s been going on for a good few weeks because it’s quite complex and the figures are very, very tight. That’s really tricky.
But others I’ve done are fairly straightforward. A few weeks later, we’ve swapped over and everything’s rosy again.
How can I apply for development exit finance? Should I use a broker or go directly to a lender?
Always use a broker. I say that all the time, but not every lender does this type of product. Not every bridging lender does development exit. It’s a heavy refurb product, so you definitely can’t go to a high street lender and expect them to do this.
We go to specific lenders to do this for you. We know where to go. In terms of how you apply, let us worry about that. Just give us what we need in terms of paperwork and information and the rest is up to us.
Some Bridging Finance is not regulated by the Financial Conduct Authority.
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