Residential Development

Residential Development

Residential Development – Residential property schemes can be very profitable but can also be very risky, so it’s crucial that an appropriate solution can be found to fit the needs of the developer. We have numerous products within our Property Product Guide that are constantly being updated so that more options can be made available for ‘Starters’, Small Developers, Medium to Large Developers through a combination of Senior Debt, Stretch Senior Debt, Mezzanine and Equity Funding through our Private Lending partners.

YFTB are able to arrange bolt on services to assist developers such as: Insurance to cover ‘Abortive Planning Costs’ Pre-sales or Sales Guarantee facilities to assist developers to secure an exit on completion.

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Residential Development

Residential property schemes can be very profitable but can also be very risky, so it’s crucial that an

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What is Residential Development Lending?

There are a number of reasons why developers need to consider other alternatives to mainstream banks and lenders. Most lenders have strict guidelines and criteria that need to be matched in order for them to agree an offer.

The two most important things they will consider is:

1. How much experience the Developer (borrower) has.

They will need to show a CV that demonstrates experience similar to the project they wish to get the loan for. This can be both in the size of the project and the amount of the capital raise. It can often be the case that a developer (borrower) has experience but not under their own name (company) which can be a problem to a regular lender.

However, we look at cases differently. Typically, Contractors may wish to become developers to create larger profits rather than just ‘earn a wage’.
They will have experience but not as a ‘Developer under their own name’. We have Private Lenders that have gone through the same process and understand their journey which is why they will look at cases such as these with more positivity.

2. How much capital should a Developer submit into the project?

This is the amount of ‘cash’ that will be offered by the ‘borrower’ and is a crucial part of the way we shape a deal. Ultimately we want the Developer to keep as much profit as possible. However, it is common for a Developer not to be able to offer very much. In such cases we can offer Private Lending on a Profit share basis where the uplift profit is shared equally.
To make that work, an Acquisition & Build-out total capital raise should exceed £700K as a minimum so as not to impact the profit margin.
It helps if the land is already owned, so that this can form part of the collateral and the lenders then only need to consider the build-out element.

We talk to Developers that ‘use their own money’

The reasoning behind this strategy is that they don’t wish to pay for finance. The issue this can cause is:

1. They lose momentum and get caught in a ‘Stop and Start’ scenario.
2. They can only get on with another deal once the previous one is completed and sold.

We provide a seamless solution where the Developer can work on several projects simultaneously which will increase profit and get their business expanding far more quickly. And because the Developer is buying in costs at the same time there is likely to be more savings which will have a positive effect on their bottom line too.

Large Developers can also benefit from our Services because they are always seeking to take on as many projects as possible.
Some strategies include Planning Gain which gives them a far bigger profit once this is approved. The issue here is there is risk and they can spend a lot of money getting the project granted. We can assist by offering funding as long as the project fits with the appetite of our lenders.

Our Product Guide is approaching 60 products which are made up of Private Lenders: Institutions, Wealth and Sovereign Funds, Family offices & HNWIs, who look to provide financial support for Developments across the whole of the UK & Ireland, Western & Northern Europe**, that will give Developers a better chance of getting their deals approved.
** Limited Equity

3. Is Planning Permission granted?

Showing outline planning or letters from the council showing their stance can help but generally, we require evidence to support planning has been granted. Because no lender likes taking a punt on whether ‘it’s likely to happen’.

There are exceptions to this when a project is large enough for our Institutional investors to consider.

How do the loans generally work?

The first part of the lending process involves Senior Debt. This is typically around 60-65% LTV (Loan to Value) meaning that the ‘borrower’ needs to find 35-40% of the deposit. If they are struggling to find this we then look to Mezzanine Finance which will reduce the amount they have to contribute. This may be anything from 10-20%. So now we could be at 80% LTV.

At this point we look to the borrower to submit the shortfall. If that isn’t possible we can engage our Private Lenders who may bridge the shortfall on a Profit Sharing basis whereby a JV (Joint Venture capital) is shared on the uplift on completion/exit (when the project is sold).
We must stress that all lenders don’t generally like 100% funding situations because they like to see ‘some skin in the game’ or ‘hurt money’ from the borrower. The reason for this is simple. As the borrower has now got a vested interest they are more likely not to walk away if the project runs into difficulty.

What is Residential Development and why may someone choose to do this over other types of development?

The reason why Residential Development is attractive is because it’s a good way to get on the ladder for ‘Ground Up‘ development. Light Refurb developers will understand how to create extensions or complete small structural work, so it’s not a big leap for them to work on small projects as a starting point. So a single house may be a perfect starting point and then move to say a four unit deal and so on. The risk is less both for the Developer and the Lender and creates the CV and experience a Developer will need to grow.

Why use a specialist Development Lending company?

The simple answer is that we are specialists that work with numerous products which will be far greater than any ‘mainstream lender’. Apart from Senior Debt, we bolt on Mezzanine and Private Lenders to create an all encompassing finance solution for both Large and Small developers alike.

We don’t just work with Small Developers/Starters. In fact, our ‘sweet spot’ is working with developers that have some experience that wish to grow. So for example, we help developers that may complete two schemes a year who would like to push to do say four or five a year. This is done by use of our Equity facilities that will allow them to work on schemes even at the same time thus giving them momentum and added profit far more quickly.