Development Finance
A development loan is a short-term finance used to fund real estate projects, covering costs from land purchase through to construction and, in some cases, initial operating expenses until permanent financing is secured.
WHAT IS DEVELOPMENT FINANCE?
Development finance is a specialised funding option aimed at supporting the construction, redevelopment, or significant renovation of real estate projects, such as residential complexes, commercial buildings, or mixed-use developments.
These loans are generally structured around the project's feasibility, projected value upon completion, and its potential to generate returns, often carrying higher interest rates and shorter repayment terms compared to traditional mortgages due to the increased risk associated with development projects.
Development Finance Example
Background
An experienced real estate developer identified an opportunity in the heart of the city: a dilapidated shopping complex occupying a large plot. He envisioned transforming it into a mixed-use facility with retail stores on the ground floor, office spaces on the next two floors, and a boutique hotel occupying the top two floors.
Challenge
Having secured a portion of the necessary funds from previous successful projects, they lacked the capital needed to acquire the property and cover the initial redevelopment costs. An estimated additional £5 million would be needed to make the project a reality.
Solution
With a comprehensive business plan, feasibility study, and projected income statements showing the potential of the new development, and after an extensive review process, a bank approved a commercial property loan for the project. The terms of the loan were:
- Amount: £5 million
- Interest Rate: 7% p.a.
- Term: 2 years with staged drawdown
- Security: First charge over the property
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