Development Finance is used for all types of property development
Various types of development finance can be arranged for your specific project. You will get the most out of your developments if you understand the fundamentals of the capital stack – the total capital that can be invested in a project.
A typical stack includes various ‘layers’ or ‘financing structures’ that can be used to fund development (equity, mezzanine, stretched senior, and senior debt). Each layer carries its own set of risks, which are ranked from least to most risky for lenders.
Senior Development Loans
These loans can be used on residential or mixed-use schemes and are lower down the risk curve from a lenders perspective, therefore attracting the most competitive pricing. They are generally limited to a gross LTGDV of 60% and a gross LTC of 80%.
As the name suggests, stretched senior loans are senior loans that have had the leverage parameters stretched. These loans can also be used for residential and mixed use schemes but the loan gearing can be increased to 75% LTGDV or 95% LTC. Due to the increased leverage and risk these loan attract a higher interest rate than normal senior loans.
Mezzanine Finance is an expensive type of finance that is used to top up normal Senior Debt loans where the client requires extra leverage. Although the pricing is more expensive, the mezzanine element of a loan is generally a lot smaller than the senior loan so the blended rate across both facilities evens out to a competitive level. Combined Senior & Mezzanine debt can increase leverage up to 75% LTGDV or 95% LTC, net.
This is a partnership between lender and client and is only available to seasoned property developers. If a client does not want to contribute any funds to a scheme, JV funding can be agreed where the lender funds 100% of all project costs and the client is responsible for building the scheme out. There is generally a profit share between the two parties on a 50/50 basis.