development-finance

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.

 

Funding Development Finance: A 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.

 

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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

 


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

 

Residential-properties

 

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

 

Offices-commercial-property

 

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

 

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

 


development loan

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.

 

Repaying-development-finance-loan

 

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

 


mezzanine finance

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.

 

mezzanine-finance

 

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.

 

How Much Does Mezzanine Finance Cost?

 

mezzanine-loans

 

Mezzanine loans can be more expensive than traditional types of borrowing, interest rates typically starting at around 12% per annum.

However, the true cost of a mezzanine loan will vary from borrower to borrower, depending on the circumstances and the details provided during the loan application.

If you want to find out more about mezzanine finance, including the costs involved you can call us on 0333 414 1491 or email sales@octagoncapital.co.uk.

 

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.


mezzanine-loans

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.

 

Mezzanine-loan-repayments

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.

 


senior-debt

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.

 

Secured-loan-with-property

 

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.