Guides

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)

When Do I Pay Interest on the Loan?

You will typically pay the interest on this type of loan at the end of the loan term. As previously mentioned, the way your repayments on the loan work will vary depending on the details of your application (including your exit strategy).

The monthly interest on the loan will typically be rolled up and added onto the total amount owed by the borrower, to be repaid via the method agreed by them and the lender during the loan application process. This way, the interest is repaid on top of the rest of the loan at the end of the loan term.

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.

What Repayment Methods Are Available?

There are a variety of different repayment methods available for a development loan, each option coming with their own pros and cons, and types of borrowers they're best suited to. Some popular repayment methods for development loans include:

• Interest Only
• Rolled Up
• Development Exit Finance

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

by Lara Dolden

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.

How Much Does Mezzanine Finance Cost?

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.

by Lara Dolden

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.

by Lara Dolden

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.

by Lara Dolden

The Regulations You Need to Be Aware of When Buying a New Home

Buying a home is both exciting and terrifying at the same time. It is a process that can throw surprises at you along the way, that can become increasingly expensive the more you dig and yet can leave you residing in your dream property when it concludes.

There are few regulations placed upon you as a buyer, but there are aspects of owning a home you should be aware of before you decide to purchase, especially if you are buying an older home. If you are purchasing a new build, then there is less likelihood of complications from a survey, although you should still have certain criteria satisfied.

Energy Performance Certificate (EPC)

The main regulation you should find useful is the Energy Performance Certificate, known as the EPC, which is mandatory for homes when they are built, sold or let. It covers aspects of thermal efficiency and gives your home a rating from A to G – A being the most efficient and thus likely to cost you less in energy bills. Now more than ever before, insulating your home is an important business, a topic we explore in our article Why is Property Insulation so Important?

Survey-Dependent Regulations

As Property Industry Eye discusses, there is a drive to reintroduce a compulsory pack for home sellers, like the defunct Home Information Pack. It was a short-lived method by which a seller put together a pack of information about their home prior to it going on the market, much like a survey but conducted before a buyer had been found. They were compulsory until May 2010, but a similar project has yet to become mandatory in the UK. That means in terms of regulations, the only other ones you need to be aware of are directly affected by your survey, usually conducted by your mortgage company ahead of any purchase.

These cannot be avoided, and they are intended to give your lender a clear picture of the property they are lending money against. These could throw up all manner of problems which need resolving before you are loaned money, or that you must pay attention to in the first six months of moving in.

Typically, older homes tend to fall foul of surveys, with electrics and damp being two of the key areas which you may have to look to carry out remedial work on. Electricity can be dangerous and in older homes, particularly those that have been advertised as ‘in need of modernisation’, you may have to have a full rewire carried out. Even if you only need certain parts of the system looked at, the NICEIC regulations are far-reaching and demand a qualified contractor to work on the property. Failed wiring, fuse box breakdowns, or even broken power sockets are all serious problems facing homeowners at any time, but in a new property you may not be aware of previous problems or potential ones.

However, HomeServe outlines how with electrical insurance cover you can protect yourself from any unforeseen dangers, and against the cost of expensive repairs in the event of breakdown or malfunction. It is especially important to pay attention to this aspect of your home not only when you move in, but in the months after the purchase. It is somewhat ironic that if you bought a faulty TV and the problem became apparent a week after you purchased it, you could return it, but you are afforded no such protection with your home.

If you are asked to carry out work that involves your gas supply, you will also need to consult a qualified engineered, one who is CORGI registered. This is less likely on a survey but is still something you should consider. Regulations around the following are not as stringent, and there is flexibility for you as the purchaser:

• Plumbers
• Decorators
• Bricklayers

However, being cautious is still advisable even if the project does not demand a specific qualification, as electrics and gas do.

In terms of regulations that cover what you need to be aware of, the randomness of the survey is something to keep an eye out for. Some properties may have asbestos that needs removing, others may have bats in the loft – both of which are covered by certain regulations. If you are in any doubt, make sure you opt for a more expensive and thorough survey, as it is usually an option, and carefully pour over the recommendations and suggestions contained within.

This way, you can enjoy your new home not only when you move in, but for many years to come.

by Dan Kettle

How to Keep Building Sites Safe During Covid-19

The construction industry continues to boom during the pandemic. Following a quiet lockdown period from March to May, there has been a real eagerness to complete on properties and carry out renovations, making the most of the stamp duty cuts and trying to capitalise before another pandemic or lockdown emerges.

The property market continues to very busy, with a record number of mortgage approvals and applications for construction finance.

But with construction booming across the UK capital and other regions, it is important that any construction workers are still minimising any risk of the covid-19 pandemic spreading, especially for their colleagues and any clients living or working in their homes. Octagon provides some advice for keeping build sites safe during covid-19.

Allow for Open Spaces

Construction sites are typically in the open air - and this is something that reduces the risk of covid-19 spreading. However, as a site comes closer to completion, the spaces become enclosed, especially if you have the client living in the home at the same time. In this case, you have to take measures to make sure that windows are always open and that the spaces are not confined. You can also consider making areas just for workers or builders and not accessible for household members.

Hand Washing Stations

Using hand sanitisers or hand washing stations are important to avoid the germs and virus spreading. If you are bringing materials from different locations, you want to ensure that your hands are clean (or you are wearing gloves) and they are washed every time you leave and enter.

Some construction sites will already have hand washing stations, assuming there is a kitchen installed.

You can also access portal hand washing stations from the likes of Trovex, which are perfect for construction sites upon entry or exit - and they have also been used by schools and other places of interest.

Regular Testing

It is not unreasonable to ask for and carry out regular covid-19 testing on builders and workers, especially if they are mixing households or working on multiple jobs. The result of one person or the entire team catching covid-19 could be detrimental to the workflow, deadline and become very costly.

Home testing kits for Covid-19 are available to order online and cost just a few pounds. But ideally you should try find the ones available in bulk so that you can carry out tests daily and for multiple staff members.

Wearing Masks When in Close Proximity to Others

Wearing the correct PPE is always important if you are not in the same bubbles. So if you have different specialists and builders coming in from different locations, the correct PPE such as masks and gloves will be important.

For the very least, you may need to wear masks and gloves or show that you are regularly washing your hands just to instil confidence in the client - and demonstrate that you are taking measures towards their safety and yours.

by Dan Kettle

Why is Property Insulation so Important?

Home insulation is not a new concept in the UK, although it has had somewhat of a resurgence in the last few years This has culminated in the UK Government’s recent rolling out of their Green Homes Grant (more information), which provides homeowners and landlords with funding to make their properties greener and more energy efficient.

The responsibility for insulating and properly caring for properties in this way falls on whoever owns the property and therefore tenants and residents who have a landlord or management company will need to discuss improvements to insulation with the relevant, managing party.

How Does It All Work?

The process of insulating a property and making it more energy efficient is fairly simple and there are a number of ways in which it can be achieved, with the most popular methods being:

• Installing a new boiler
• Installing double glazing
• Loft insulation
• Cavity wall insulation
• Under-floor insulation

Installing a New Boiler

Older boilers are not as efficient as newer models, which utilise gas more efficiently. As boilers age, they also tend to run in to various problems (particularly when they are not properly serviced over the years) such as fan and motor problems and components of the boiler becoming aged and overused. Although it is entirely possible to keep boilers running for many decades, as time goes on, the boiler is more likely to use more gas less efficiently, being worse for the environment and your bills.

Installing Double Glazing

A tried and tested method for improving energy efficiency and improving the integrity of the building in question’s envelope (the barrier that separates the inside and outside environments.) The better the protection between the interior and exterior environments, the better heat will be retained in the cooler months and cooler air maintained in the hotter months. Also, double glazing will help keep the property at a more stable temperature, putting less strain on the heating and therefore boiler.

Loft Insulation

The loft or attic of a property is usually where much of the heat is lost from the property in question. Heat rises and therefore it is logical that the highest point of the property [the loft] ill be where a large amount of heat is lost. Insulating the loft and attic means that less heat will be lost and will be contained within your property, allowing for less work being required by the central heating and boiler.

Cavity Wall Insulation

In the case of many early 20^th Century properties, there is a gap [cavity] between the interior wall of the property and the exterior wall. This was designed so that the elements outside such as the rain and moisture cannot penetrate into the property. However, a major drawback of these designs of property is that the cavity allows cold air to infiltrate by filling the cavity, the building envelope is better secured and the property will be more energy efficient, greener and better for the environment.

Under-Floor Insulation

Surprising to many people is that the underfloor region of their property is poorly insulated. Underneath the flooring you will have in your property, be it carpet or otherwise, there will be the floorboards and underneath will be the joists, supporting the floor and then usually, a gaping space. this space allows for cold air to penetrate, making the property less energy efficient. Fixing this by insulating this is a great way to improve the energy efficiency and retention of your property.

by Daniel Tannenbaum