How Does Development Finance Work?

Development finance is a flexible way to fund property development projects, allowing borrowers access to capital faster than traditional banks. Typically, development finance does not adhere to such strict lending criteria meaning that finances can be obtained more easily. This type of finance typically allows the borrower access to greater sums.

Two Part Process

Typically development funding works in two parts.

  1. Land Costs
    The first is securing the development site and providing the funds to cover this. This may be a plot of land where a new build will be built or an existing property that developers are wanting to refurbish. Typically, lenders will contribute towards a percentage of the land costs.
  2. Build Costs
    The second stage of the funding is covering all of the costs of the building works for the project. Depending on the agreement made, this typically happens monthly to cover ongoing costs rather than one lump sum. The majority of lenders will offer a maximum of 75% of the total build costs.

How Much Funding Can Be Secured?

If you come across an opportunity to build, renovate or develop a property, Octagon Capital can give you access to capital in order to help fulfil your project. The amount you can borrow is based on the Gross Development Value (GDV), the estimated value of the project upon completion. With Octagon Capital, you can apply to borrow up to £25 million towards your development finance project. This figure is based on around 100% of build costs and 50% to 70% of the land costs.

The amount of funding available varies depending on multiple factors including the type of project, how experienced the developer is, and the forecasted costs of the build. There is an Independent Monitoring Surveyor (IMS) who works on behalf of the lender to oversee budget and time-frame. The costs of the IMS will also be incurred by the borrower.

3 key factors that will be considered before any development loan:

  1. Current value of the site (pre-development or pre-refurbishment)
  2. The build costs
  3. The gross development value after the works

Other factors vary from lender to lender but may include:

  1. Maximum loan amount
  2. Length of loan
  3. Interest rate
  4. Proportion of borrowed money out of overall costs

 Why Choose Octagon Capital?

Octagon Capital offers a personalised approach. The initial meeting allows you to outline your project with one of our team members. From that we can assess your needs and set about finding the best course of action to see your project plans into fruition.

 

Contact us at Octagon Capital to explore the best options for development finance

 


Is Development Finance the Right Option For Me?

If you are looking to do a total large-scale renovation or build from scratch, development finance is a great option to secure the funding that you need. They allow you money in the short-term to finance your projects and you pay back the loan and any additional incurred costs after the properties are sold. Development finance is an ideal solution for those looking for short-term funding (usually between 6-18 months).

What Can I Use Development Finance For?

Development finance can be used to fund many different purposes covering everything from new builds to buying land to major renovation projects.

Residential Property Development

For those looking to renovate, refurbish or buy properties for residential purposes, development finance can be a great choice. This is true whether your project involves single residential builds to larger-scale multi-unit development complexes. With Octagon Capital, you can access funds for construction costs and purchase the property with a flexible repayment plan. Upon completion, you have the flexibility to either sell the flats at a higher price or rent them out.

Commercial Property Development

If you are wanting to finance a commercial property development project, development finance could be the ideal solution. Whether your projective involves offices, shops or even vacant land, development finance could help fund all of the fittings and fixtures of a commercial property. Speak to an advisor today to learn more about our panel of lenders, many of whom are experienced in commercial property development.

Ground Up Development

Development finance is a perfect option for those looking to start from zero. Those looking to take on such a grand project need not be put off by the funding part. Whether you are starting with a completely empty plot of land or looking to totally renovate an existing property, development finance can help you fund the project. Once completed, you can reap the benefit of a fully functioning property, ready to sell on or rent out.

Advantages of Using Development Finance

Even for those lucky enough to be able to self-fund a development project, there are benefits to looking to development finance to cover some or all of the costs. Opting for development finance enables:

  • Access to larger funds
  • Untouched personal cash flow
  • Ability to take on multiple simultaneous projects
  • Greater return on investment rate

Am I Eligible For Development Finance?

To be eligible for development finance with Octagon Capital you must meet the following criteria:

  • You must be based in UK, Scotland or Wales
  • You must have information including GDV, construction and site costs
  • All credit histories considered
  • Must be a limited company

What Information Would I Need?

In order to apply for development finance with Octagon Capital you can make a quick enquiry via phone call, email or filling out the contact form, with just a few basic details including:

  • Details of the development project
  • Property size
  • Amount you are looking to borrow

With those few details, an advisor can indicate what possibilities are available, how much you could potentially borrow and at what rates.

 

Contact us at Octagon Capital so see what is the best option to suit your project needs

 


Repaying a Development Loan

Borrowers will need to repay lenders according to the agreed term after the sale of the property. One of the greatest advantages of development finance is its flexibility for borrowers meaning that there are many different repayment options. In certain cases, an extension can be provided in order to give more time to secure the sale although this may incur additional costs.

When Do I Have to Repay the Development Loan?

At the beginning of the financial agreement, a repayment plan including timescales is agreed by both parties: those lending the money and those borrowing. As part of this, lenders will want to see an ‘exit plan’ before agreeing to the loan. Development projects are usually repaid through sale or refinance.

Most common exit routes: 

  • Build to sell (sale of the finished property)
  • Refinancing using a developer exit product
  • Long term refinancing (including build to rent)

How Much Interest Do I Need To Pay?

There is not a set rate for property development finance. When seeking this type of funding, you will be matched with the best lender for your project needs from a panel of specialist property development lenders who will negotiate the best rate for each proposal.

As such, interest rates will vary from lender to lender and depending on the specific details of the project. A reasonable starting point is around 6.0% interest rate. Typically, this can be rolled up into the loan to avoid the necessity for monthly payments.

Most facilities are set up to allow monthly interest charges to be repaid once the loan is redeemed. The interest is added to the facility, rather than the developer, so they can focus on the project rather than payments.

Thus, interest is payable upon completion of the project and the agreed exit strategy. If any units of the development are sold before the end of the project, those proceeds can also be put towards paying off the outstanding amount.

Repayment Methods

Interest Only

Most development loans are arranged on an interest-only basis meaning that at the end of the works you need only repay the interest accumulated throughout the duration of the project. Development loans are typically short-term loans (between 6-18 months) so at the end of this period you would pay the interest. Eventually, you can pay off the full loan either as a lump sum or with higher monthly payments. This usually coincides with the sale of a unit or multiple units of the development.

Rolled Up

Rolled up interest payments mean that you pay everything back at the end of the project in one lump sum. This negates the need for monthly payments and allows developers to focus solely on the completion of the works. At the end, with the agreed exit strategy, they will pay back the loan with the accrued interest.

Development Exit Finance

Exit finance allows you to repay development finance before the sale of your development, should you choose to do so. Exit finance typically holds a lower rate than development finance. The key reasons to use this type of financing are:

  • Reducing costs and increasing the profitability of the project
  • To act as a buffer if your existing development finance is coming to an end and will not cover the end of your project
  • In order to free up capital earlier leaving you more capital to fund future projects

Contact us at Octagon Capital to explore the best options for development finance

 


UK Veterans

Key UK Veterans Demographics

 

Who are UK Veterans?

A UK Veteran is anyone who has served in Her Majesty’s Armed Forces (Regular or Reserve) or Merchant Mariners and have been on duty during a legally defined military operation, be it for one day or on a much more long-term basis. In terms of demographic, around 60% of UK veterans are aged 65 and over, with 40% between the ages of 16 and 64.

 

60% of the UK's Veteran Population is of retirement age or above (Image courtesy of Office for Veterans' Affairs)

 

How Many UK Veterans are there?

A 2007 study carried out by King’s College London estimated around 4.8 million veterans living in private residential households across the UK. In England, this figure was roughly 3.9 million. However, they predicted that due to the ageing veteran population, the figures would decline from around 4.8 million to 3.1 million by 2020. According to more recent data from the Office for National Statistics (ONS), the estimated total of veterans living in Great Britain in 2017 was 2.4 million.

 

There are 2.4 million veterans residing in Great Britain (Image courtesy of Office for Veterans' Affairs)

 

By 2028, the Ministry of Defence projects that there will be approximately 1.6 million UK Armed Forces veterans living in Great Britain. For every 80 of these veterans, they predict that 35 will be of working age (16-64 years), and 45 veterans will be of retirement age (65+ years). They predict that the veterans will be predominantly male (70) and 10 will be female. Although the total number of veterans living in Great Britain is set to decrease in the coming 10 years, the percentage of working age veterans will increase by 7% between 2016 and 2028. The volume of female veterans is also forecasted to increase by 3% over the same period.

 

 

Where do UK Veterans Live?

The Ministry of Defence released a report showing the living areas which are more densely populated by veterans. They revealed that over one-third of Armed Forces pension recipients live in the South East or South West of England. However, in contrast to the classic retirement spots favoured by many, Bournemouth and Eastbourne are not typical residential spots for veterans. Interestingly, many choose to reside near their former military base. As such, Royal Navy veterans tended to live in Portsmouth or Gosport (7,760 veterans) or Plymouth (6,996). Army veterans, on the other hand, tended to live across Wiltshire, known as the home county of the Army (15,338 veterans). Many RAF veterans have gravitated towards Lincolnshire in which 17,292 veterans make up over 2% of the overall population of the entire county. Other popular residential areas for veterans include Cornwall, Fife and County Durham. By contrast, very few veterans live in London. Veterans make up less than 0.1% of London’s population with under 9,000 veterans in total.

 

How Many UK Veterans Live Abroad?

Australia is the country most densely populated by ex-patriate UK veterans with about 2,224 veteran recipients calling the country home. Spain, a popular retirement favourite for many Brits, is home to about 439 veteran recipients.

 

Average Household Income for a UK Army Veteran

Depending on the rank, those employed by the British Army or other UK Royal Armed Forces could be earning anywhere between £20,200 (for privates) to £120,700 (for Generals) annually, according to 2020 data.

 

Mortgages

Statistics from the Annual Population Survey (2017) show that 76% of veterans are home-owners or have a mortgage. Additionally, they showed that veterans are just as likely to have bought their own home as non-veterans.

 

76% of veterans own their own house or have a mortgage (Image courtesy of Office for Veterans' Affairs)

 

Housing Support

The Ministry of Housing, Communities and Local Government (MHCLG) has implemented various measures to make social housing more accessible for veterans. They work to change the law so that Service personnel who are seriously injured are given high priority for social housing by local authorities.

 

Homelessness in the Veteran Community

Only a small minority of veterans become homeless. Data from 2014 showed that an estimated 3% to 6% of Armed Forces veterans were sleeping rough in the UK. According to data from the Combined Homelessness and Information Network (CHAIN) Greater London annual, of the homeless population in the UK, the percentage who were UK nationals and former Armed Forces workers dropped from 3% in 2017/2018 to 2% in 2018/2019. The government-supported Homeless Reduction Act of 2017 works towards an end of rough sleeping. As part of this, the Military of Defence, along with other public authorities, is asked to refer Service Leavers at risk of homelessness to the local housing authority of their choice.

 

Employment for UK Veterans

 

According to the 2017 Annual Population Survey, 79% of working age veterans are employed and are just as likely to be employed as non-veterans. Similarly, 92% of working age veterans have a qualification and are as likely to have a qualification as non-veterans.

It is estimated that 86% of service leavers who used the CTP in 2018/19 were employed within six months of leaving the Armed Forces, with a further 8% either in full-time education, training or not actively looking for work.

 

86% of service leavers using the Career Transition Partnership between 2018 and 2019 found employment within six months (Image courtesy of Office for Veterans' Affairs)

 

Employment Opportunities for Veterans

UK Veterans returning from service are encouraged, if they are able, to continue to work not simply for financial reasons but also to keep them occupied and boost mental wellbeing. Armed Forces’ roles typically lead to a range of transferable skills which are desirable in many different sectors. However, it can sometimes be challenging to return to civilian life. Sometimes it is difficult to identify which military skills can be transferable to a working environment. In some cases, jobs may require industry-specific skills. Apprenticeships and short courses can be a good option to prepare for these types of roles.

 

Top Industries for UK Veterans

One of the most highly recommended sectors for veterans are skilled trades as it requires many of the same skills used in the military. Thus, roles such as technicians, electricians, mechanics and plumbers could be suitable. Invariably, these roles also involve financial support for training. Specific roles such as aircraft mechanic or car mechanic could be perfect for former RAF employees or car mechanics, respectively.

Engineering Roles

Many undergo some form of engineering training during their military experience. Consequently, careers in this sector could be a good option when leaving the Armed Forces. In particular, aerospace and defence manufacturers often seek out veterans with engineering skills as they have experience with the specific equipment.

Healthcare

Veterans often have experience assisting sick or wounded military personnel during their career in the armed forces. As such, a career in the healthcare sector is often the chosen path for veterans. With specific training and education, veterans could be employed in this sector within two years. These can include anything from occupation therapy assistant to nurse to dental technician.

Education

Support from the government is often provided for veterans looking to break into the education sector. Building on experience of mentoring or training, many find that a career in teaching is a natural progression.

 

Support Offers for Veterans Seeking Employment

There are many government-supported schemes available for veterans. The Military of Defence directly funds employment support through their Career Transition Partnership (CTP) service. This free service supports Armed Forces Leavers for two years after they are discharged. It helps veterans to recognise their skill set and how it may transfer to specific careers.

There is also support available for employers via the Defence Employer Recognition Scheme (ERS). Through this scheme, they reward employers who support the Armed Forces. They give Bronze, Silver and Gold awards to employer organisations who actively support the Defence and Armed Forces communities.

Statistics show that 86% of service leavers who used the Career Transition Partnership in 2018/2019 were employed within six months of leaving the Armed Forces. A further 9% were in full-time education, training or not actively seeking employment.

 

Veteran Health

 

Prevalence of Illness in Veterans

When it comes to general health, statistics from the Annual Population Survey 2017 report no differences between veterans and non-veterans. However it is widely reported that veterans are more vulnerable to mental health issues. Post-traumatic stress disorder (PTSD) is highly prevalent in UK Service Personnel and veterans. A study by KCMHR estimated that the overall rate of probable PTSD for current and ex-serving regular military personnel was 6% in the 2014/2016. This is a 2% increase from earlier cohorts, meaning that either PTSD is becoming more prevalent, or we are becoming more aware. As a comparison, the rate of PTSD in the civilian population is 4.4%. Various government bodies and charities are heavily committed to investigating death, especially suicide, in veterans in order to provide further support for current and future employees of the Armed Forces.

General Healthcare for Veterans

The NHS is largely responsible for providing veteran healthcare, including the provision of mental health support. In addition to all the services available to the general population, there are many specialist services specifically for veterans. These include priority access to NHS secondary care for service-related conditions. As of February 2020, there were 700 accredited practices specifically designed for GP practices to understand the needs of veterans and their families.

Mental Health Services for Veterans

There are two specific veteran mental health services provided by the NHS. One, the Transition, Intervention and Liaison Service (TILS) provides treatment services encompassing identifying early signs of mental health problems to full therapeutic treatment for complex mental health difficulties. The other, the Veterans Mental Health Complex Treatment Service (VMH TILS), provides intensive care and holistic treatment for veterans and their families to support the most complex cases.

 

Veterans and the Justice System

 

Offender Management Statistics, compiled by the Ministry of Justice, l]proved that those who have been in the Armed Forces are no more likely to commit criminal offences than civilians. In fact, they are less likely than the general population to commit a crime. Former members of the Armed Forces only accounted for 3% of those entering prisons in England and Wales in 2019.

Those veterans who do find themselves in prison have support from the UK government including helping them to improve their lives once they return to the community. The Military of Defence stays in contact with prison governors in order to ensure appropriate support and potential additional support from the Veterans’ Welfare Service. It helps to specialise their rehabilitation needs and point them in the right direction of all the resources available to them, including from specific charities.

 


Is Mezzanine Financing Right For Me?

Who is Mezzanine Finance For?

Mezzanine finance can be the right option for those looking to develop a high-risk, high-potential project. It can be a way to borrow a large amount of capital in the short-run with flexible repayment. Depending on the project, it is worth considering all options including bridging loans, development finance and speaking with expert investors.

Am I Eligible for Mezzanine Finance?

Before deciding whether mezzanine finance is the right choice for you, it is worth checking whether or not you are eligible to receive it.

The eligibility criteria for mezzanine finance with Octagon Capital are the following:

  • You must be based in UK, Scotland or Wales
  • Must offer up to 20% in equity
  • All properties considered including commercial and residential
  • All credit histories considered
  • Must be a limited company

What are the Advantages of Mezzanine Finance?

For companies looking to borrow money, there are many benefits to mezzanine financing. Not only does it provide them access to capital, it can often mean borrowing more money than traditional loans can offer. Borrowers can also minimise their equity dilution rather than trading a substation amount of equity for capital.

One of the key benefits of mezzanine financing is flexible repayment for borrowers. There are multiple options available including cash, adding to the loan balance or providing equity for the lenders. It also allows them an element of flexibility when presenting debt as they are able to list mezzanine loans as equity on their company balance sheet. Additionally, interest payments can be deductible to the business.

What are the Drawbacks?

Like any loan, there is always a financial risk. Mezzanine financing is typically synonymous with high interest rates. As such, businesses may be faced with big debts in the case of company failure. One of the conditions of mezzanine loans is that if borrowers are unable to make repayment in cash, they may have to recompense lenders with equity interests. Because this type of financing is a high risk for lenders, it means that lenders can set high interest rates or make other specific demands.

Lender Perspective: Is it a good idea to provide mezzanine financing?

One of the biggest advantages for lenders is the high interest rates associated with mezzanine financing. To balance out the high risk, it means that the eventual pay out can be very high. Additionally, lenders could potentially receive equity. If a business succeeds, this could be hugely profitable for the lender.

Despite the pros, it is important to note the high risk nature of this type of financing. Whilst lenders are always at risk of losing money to default, this is especially true for mezzanine loans. Additionally, the fact that they are considered “low priority” loans means that, in a worst case scenario of bankruptcy, lenders risk never being repaid.


How Do Mezzanine Loans Work?

  • Mezzanine loans blend equity and debt and sits somewhere between senior debt and equity
  • They are associated with high interest rates but flexible repayment plans
  • Mezzanine financing can be advantageous for companies looking to accelerate at a faster rate than traditional lenders can offer

 

How do Mezzanine Loans Work?

Mezzanine financing acts as a capital resource and falls between senior debt and equity. Through this, it maximises the total leverage with negligible equity dilution. The terms and conditions of a mezzanine loan are dependent on the agreement between a business and the lender. For lenders, mezzanine loans balance out the high risk with potential for extremely high rate of return, often receiving annual rates of between 12% and 20%, and even as high as 30%.

When working as a mezzanine lender, it is recommendable to work with an already established company with a successful history of business transactions. If investing in a less established business or start-up, the stakes are higher, and there is more risk. As such, the interest rate may be higher and the repayment plan more flexible. Whatever the agreed terms, mezzanine loans blend debt and company equity to benefit both parties. Typically, mezzanine loans have a fixed interest rate with no amortisation.

 

Characteristics of a Mezzanine Loan

  • They are subordinate loan and are low priority compared to senior debt but take priority over common stock
  • They have higher yield potential than ordinary debt
  • There is no amortisation
  • Repayment is usually flexible: Mezzanine loans can be structured as part fixed and part variable interest
  • They are commonly unsecured debts (not backed by collateral)

Repayment Plans and Interest Rates

Mezzanine loans are associated with higher costs than traditional borrowing. Lenders can ask for traditional repayment (often in the double-digits) or they could request equity exposure in order to supplement the interest.

Repayment plans tend to be more flexible with these types of loans. For businesses, cash flow is not always available. Mezzanine loans recognise this and, as such, offer the option for companies to capitalise interest charge by means of ‘payment in kind’ (PIK). This means that the company is able to offer repayment in a form other than cash. This can be a good or service but, in this case, typically refers to bonds, stock or equity.

When Do you Have To Pay Back an Equity Loan?

Mezzanine loans are an example of a subordinated loan. This means that they are low priority for repayment. In the event of a business failing, it is possible that they are not able to cover all of their debts. In the hierarchy of repayment, mezzanine loan repayment is low priority and can only be paid after all other, high priority payments have been covered. Top priority payments are usually the banks and senior shareholders. Mezzanine loans are further down the list than these payments but they fall above common equity.

 


Mezzanine Finance vs Senior Debt

What is Senior Debt?

Senior debt refers to the level of priority a loan repayment holds. This type of debt has priority over other repayments meaning that it is borrowed money which a company must first repay if it goes out of business. Senior debt has priority over all other classes of debt and other classes of equity. Subsequently, if a company is suffering financial difficulties or liquidation, these debt holders will have a priority claim.

Which Loans are Classified As Senior Debt?

The majority of secure loans would be classified as senior debt. Loans taken out from banks, other financial institutions and high-grade debt securities including mortgage bonds would all be considered senior debt. Subsequently, this type of debt is considered “low-risk” from a lender perspective. These loans are often issued by large and secure financial institutions with pooled capital. Due to this, these loans typically offers a lower interest rate than subordinate loans.

Order of Priorities

Each type of financial assistance has a different priority level when being repaid. Senior debt takes priority over other borrowed money if a company enters financial problems and is the first tier of liabilities for a company. They are considered top priority as they are usually secured against collateral. Junior or subordinated debt falls lower on the list meaning that a company has less pressure to pay back these loans. However, this comes at the price of higher interest rates. Preferred stockholders are lower still and common stockholders are last on the list.

Junior Debt

Junior debt, also known as subordinate debt, takes a lower priority position because of their relative high risk. Yet, they generally pay greater yields than other loans. As such, it is riskier for an investor to own but can deliver a higher rate of return. These creditors have access to a company’s assets only after the senior debt has been repaid.

How Does Senior Debt Differ from Mezzanine Finance?

Mezzanine finance is a type of junior debt meaning is it lower in the list of priorities when paying off debt. This is compensated by the high potential that they offer lenders. Mezzanine loans are typically high-yield and high-risk and combine debt and equity. Octagon Capital allows you to take out as much as £25 million in a mezzanine finance loan, much higher than you would be able to obtain financial institutions or banks. However, to balance this out, a lender also takes a stake of the business due to its high potential. Unlike senior debt, mezzanine finance is not secured against any form of collateral.