We have compiled a list of some of the most commonly used phrases in the property development finance industry. These are not dictionary definitions, but will give you an understanding of this sector’s terminology;
Types of Finance
Senior Debt Development Finance – a lender takes the first charge on the asset and typically lends an amount towards the property purchase or existing estimate value, plus 100% of the construction costs. This type of lending generally goes up to 60-65% of GDV.
Junior Debt or Mezzanine Finance – a second lender provides a loan on top of the senior debt development finance which can take the overall lending to 70-80% GDV, though this typically has a ceiling of 75% of GDV. This type of finance is useful when the developer is looking to maximise their return on equity or put in a minimal amount of equity into the project typically between 5-10% of the total costs.
Stretched Debt Development Finance – a lender takes first charge on the asset similar to senior debt development finance, but the leverage stretches to a similar level of senior debt development finance combined with mezzanine finance at 70-75% GDV. The advantage is that there is less costs due to there only being one set of lawyers representing the lender and one valuation. With just one underwriting team to satisfy, it can also be quicker.
Equity Finance – provides an opportunity to a developer where they are only required to put in 0-2% of total costs. The equity finance will plug the gap required between the senior debt development finance and 98-100% of costs. The structure of the agreements can vary considerably but there will typically be an interest rate on the funds deployed, plus an agreed profit share at the end of the project.
Joint Venture Finance – typically 100% of the development costs will be provided by the joint venture finance partner. Similarly, like with equity finance, a profit share is agreed upon by both parties and sometimes interest is charged on monies deployed. Joint Venture partners may bring in their own preferred senior debt providers to maximise their equity returns.
Development Finance Terminology
Gross Loan – the total loan the lender is offering which includes all interest and finance fees.
Net Loan – the finance that is provided to the developer towards the acquisition costs and the construction costs.
Net Day One Loan – the amount a developer will actually receive on day one towards the property purchase or existing value.
Total Development Costs – includes everything that can be classed as a project’s development costs including; all acquisition costs, construction costs, professional fees, contingency, building control, service charge, planning, legals, sales and marketing.
Loan to Cost – the percentage that is calculated by using the loan amount offered by the lender to the total development costs.
GDV – Gross development value (GDV) is the value of the development once the works are completed and all certificates are in place.
Loan to GDV – the percentage that is calculated by using the loan amount offered by the lender to the GDV.
Rolled Interest/Interest Roll Up – most development finance lenders will roll up the interest and this will be paid at the end via sales or refinance.
Retained Interest – some lenders will retain the interest upfront from the loan rather than taking it at the end.
Serviced Interest – interest payments are made on a monthly basis. Only a few development finance lenders will allow interest to be serviced monthly, as this can be viewed as a higher risk. The benefit to the developer is that they may be able to receive a higher net day one loan, but they have to show the monthly payments are affordable.
Default Rate – the increased rate of interest the borrower will pay if the site falls into default.
Term – how long the loan is agreed to be set over. Typically, this is from six to 24 months.
Drawdown – when the lender releases funds to the developer to go toward the project. There will typically be monthly drawdowns to assist in the funding of the construction element for the project.
Cross-collateralisation – when a lender uses more than one asset as security for a single loan.
Interest and Profit Calculations
Compounding Interest – when interest is calculated on the principal and the accruing interest on the previous loan periods.
Cumulative Development Finance Calculator – a model used by some lenders to project finance costs on a compounding basis.
Drawn Balance – when the interest rate is applied to the amount of funding that has been used so far, rather than on the total facility from the start.
IRR – a model used by some lenders who have an internal rate of return (IRR) to hit, and work back from that return percentage to come up with what they can lend.
Non-compounding Interest – when interest is calculated on the principal only.
Lazy S-Curve – a model used by some lenders to predict a developers cashflow, and therefore finance costs, throughout the build period.
Return on Costs – a very useful marker to see whether the project is profitable enough for it to be fundable and whether the purchase price is at the right level. The calculation is profit divided by the total costs. Typically, projects will need to have a ‘return on costs’ of 25% or more.
Margin on Revenue – another useful guide when assessing a financial appraisal to see if the project has the strength and profitability to succeed. Margin on Revenue is the profit divided by the GDV. Typically, this calculation will need to equal 20% plus for the project to be fundable, but this is dependent on the term of the project and size of the deal.
Pre-Offer Documents required
Planning Decision Notice – confirms any conditions that have been added to the planning permission that has been granted.
Financial Appraisal – typically a spreadsheet which breaks down the acquisition costs, construction costs, sales costs, and GDV to show what the profit is for the deal.
Asset and Liability Statement – demonstrates the strength of the borrower by showing what assets they have accumulated over time, which assist in supporting a personal guarantee that may be required.
Cashflow Schedule – a monthly breakdown of the required funding for the project, and what activities the funding is required for.
Floorplans and Drawings – provided by the architect to show the key details of how the layout of the building has been set and what it will look like.
CGIs – Computer generated images (CGIs) which have been applied to the floorplans and drawings to create a detailed picture of what the development will look like once the works are completed.
Schedule of Accommodation – a breakdown of all the units and the sizes. Typically, this will show both the gross and the net internal area in square metres and square feet.
Pricing Schedule – this is where the expected sales values have been input alongside each unit in a schedule of accommodation.
Comparables – supporting evidence demonstrating which local properties have been sold or are on the market that can be compared to the new project in the presentation.
Post Offer Documents required
Collateral Warranty – a warranty between a professional consultant (for example: contractors and sub-contractor) and a third party (for example: lender) ensuring that they have complied with the professional appointment/contract.
Conditions Precedent – conditions of the loan to which the developer must comply.
Debenture – a debenture gives protection to a funder who lends money to a business. It gives lenders a priority position in the list of people who would be paid if a company becomes insolvent.
JCT Contract – Joint Contracts Tribunal (JCT) Contract, signed by the lead building contract. The JCT contract is in place to set out the responsibilities of all parties within the construction process and their obligations, so it is clear as to what work needs to be done, who is doing it, when they are doing it by, and for how much.
Legal Charge – a charge against the property stating that the lender can take control of the site if the client does not comply with the terms of the loan.
New Homes Warranty – Ten year insurance which protects buyers of new builds from structural defects.
Personal Guarantee – a personal guarantee (PG) from the borrower confirming that they can support the loan. Usually around 25% of the loan amount.
Professional Indemnity Insurance – Professional indemnity insurance (PI cover) covers legal costs and compensation in the event that the third party contractor or consultant provides an inadequate service.
Permitted Development – the permission to build without going through the full planning process. This mainly refers to the conversation of office space to residential, which has become a popular alternative to ground-up developing.
Outline Planning Permission – a level of planning that is more advanced than a pre-app but not as strong as having full planning.
Section 106 – this is a legal agreement between developer and planning provider which is part of a development that gives back to the community in the form of transport links, car parks and play parks.
Section 73 – Section 73 of the Town and Country Planning Act 1990 allows applications to be made for permission to develop without complying with a condition(s) previously imposed on a planning permission.
Community Infrastructure Levy – Community infrastructure levy (CIL) is usually an amount that a developer must pay to help develop the local area.
Design and Access Statement – a design and access statement (DAS) is a report which supports a planning application. They explain why the specific development is suitable to that site.
Contaminated Land – land deemed unfit for development due to pollution or contamination.
Private Renting Sector – Private renting sector (PRS) are properties owned by landlords and rented to tenants.
Register Provider – social landlords who own social housing.
Affordable Housing – Affordable housing provided for eligible households where the market does not provide for their level of income.
Grade II Listing – a grade II listed building is a building of ‘special interest’, and therefore warrants protection.
Our advisers and support team are continuously reviewing the market to stay current on the industry’s latest news and trends. If you have any questions about the terms in this article, about development Finance, or are wondering how you can get started, enquire here today.