Building from the ground up
Ground up development finance is for property developers, covering up to 70% of land costs and 100% of construction costs, turning unutilised land into valuable assets.
There are many types of finance options, debt, equity and hybrid, each with its own benefits for different types of development projects.
To qualify for ground up development finance you need a proven track record, financial stability and a detailed project proposal.
We will go through the types of finance, the benefits and how to qualify. Learn how to make your project a success with the right ground-up funding.
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What is Ground-Up Development Finance
Ground up development finance is used by property developers to cover the costs of buying land and then building new properties.
It can help turn unutilised land into residential, semi commercial or commercial properties.
Ground up development finance can cover up to 70% of land costs and 100% of construction costs, a full funding solution for big projects.
The flexibility of ground up development finance is one of its biggest advantages.
It caters for all types of projects, with solutions that can be tailored to residential and commercial developments. This flexibility means developers can get the funding they need to bring their ideas to life, regardless of the project size or complexity.
It also provides funding that can optimise the capital structure of the development.
Plus ground up development loans includes staged payments which align the funding with the project progress and higher loan amounts to cover big development costs.
development finance optionsTypes of Ground Up Development Finance
Knowing the types of ground up development finance helps developers choose the right funding for their project.
The main categories are:
- debt finance
- equity finance
- hybrid finance.
Each has its own benefits and can be tailored to different types of projects. Bridge finance is also an option for the initial land purchase, bridging the time until development finance is secured.
Debt Finance
Debt finance is a favourite among property developers because of its structured repayment terms, including rolled up interest and the ability to borrow against the projected value.
Senior debt finance is used to buy land and cover construction costs. This type of finance is less risky for lenders as they have first claim on the project cash flow and sale proceeds. Developers can borrow up to 65% of the project’s GDV through senior debt finance, a solid option for big projects.
Stretch senior debt is a variant that offers higher loan to value ratios but higher interest rates. This is available to established property developers with a good track record as it’s a higher risk and higher value loan.
Mezzanine finance is another type of debt finance, that is subordinated debt, where the lender is repaid after senior debt providers in the event of default. This is for developers who want to fill the gap between senior debt and equity, an extra layer of funding.
When full funding is required 100% structured finance can fund the entire development cost based on the end value. This is ideal for high value projects, developers can start without upfront capital. However this type of finance is for projects with very high projected returns, requires other assets in the background and has strict lender requirements.
Senior Debt Finance
Senior debt finance is the foundation of development finance, the funding that brings property development projects to life.
Offered by banks, specialist lenders or private equity firms, it is secured against the property being developed. It’s the primary funding source, covering most of the construction costs and allows the project to move forward.
For experienced property developers senior debt finance is a go to option because of its structure and security to lenders.
These lenders require a detailed business plan that includes financial projections, market analysis and a clear exit strategy. This comprehensive documentation shows the project viability and the developer’s ability to manage the development process.
One of the key features of senior debt finance is the first charge over the site.
This means in the event of default the lender has priority over other creditors, an extra layer of security. Interest rates and fees for senior debt finance can vary depending on the lender, the project risk and market conditions. But the structured repayment terms and ability to borrow against the project GDV makes it a good option for big projects.
senior debt loans explainedMezzanine Finance
Mezzanine finance is a flexible type of development finance that ‘tops-up’ the development loan and fills the gap between senior debt and equity.
Used by property developers who need extra funding to complete their projects, mezzanine finance can be a loan or equity investment. This type of finance is provided by specialist lenders or private equity firms and is secured against the property being developed.
One of the benefits of mezzanine finance is that developers can access extra capital without diluting their equity significantly.
The lender providing mezzanine finance has a second charge over the property, they have lower priority than the senior debt lender in the event of default. This subordinate position comes with higher interest rates and fees, the extra risk the lender is taking on.
Mezzanine finance is ideal for developers who have already got senior debt finance but need extra funding to cover additional costs or unexpected expenses. By combining senior debt and mezzanine finance developers can create a robust financial structure to complete their projects.
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Equity Finance Options
Equity finance is raising capital by selling shares in the building project.
This allows investors to share in the profits and losses of the project and aligns their interests with the project success.
Common equity finance options are preferred equity and joint ventures.
Preferred equity finance is where investors have predetermined rights to repayment and dividends, often including a preferred return, they have more control over the project than traditional equity investments.
Joint ventures are another equity finance option where two or more parties collaborate on a development project, sharing the risks and rewards. This arrangement brings together different expertise and financial resources to the project.
Equity finance can be attractive to developers who don’t want to take on debt, it’s funding without the regular repayments.
Joint Venture EquityHybrid Finance Options
Hybrid finance options combine elements of debt and equity finance, giving developers more flexibility in structuring their funding.
Mezzanine finance is a hybrid solution, capital is provided at higher loan to value ratios in exchange for equity in the project. Developers can access extra funds without diluting their equity significantly. Convertible debt is another hybrid finance option that can be used in this situation.
Ground up development finance also offers bespoke solutions such as rolled up, retained or serviced interest which can be tailored to the project cash flow. These hybrid options give the best of both worlds, developers can use debt finance’s structured nature and equity finance’s risk sharing benefits including a development loan.
Benefits of Ground Up Development Finance
Ground up development finance has several benefits that makes it a good option for property developers.
One of the main advantages is its flexibility, the finance can be aligned to the project progress. The staged disbursement of funds helps in cash flow management, developers have access to capital when they need it most. Effective financial management also helps to mitigate the risk of cost overrun which can be a big issue in large projects.
Also ground up development finance provides access to large amounts of capital which is needed to develop large construction projects on greenfield land. Experienced developers can get loans up to £250m to cover site acquisition and property development finance. This level of funding gives developers the confidence to take on big projects and achieve their development goals.
How to Get Ground Up Development Finance
To get ground up development finance developers need to demonstrate a proven track record of successful projects.
Lenders prefer experienced developers with a history of delivering similar projects, it reduces the risk.
However inexperienced developers can get funding if they can present a viable project plan with robust financials and planning permission.
Financial stability is another key factor lenders look at.
Developers need to provide evidence of their financial health, credit scores and detailed development proposals.
This information helps lenders to assess the project viability and the developer’s ability to manage the financial commitments of the development process.
Thorough due diligence by lenders means only well prepared developers get competitive rates.
Gross Development Value (GDV)
Gross Development Value (GDV) is a key metric in development finance, and represents the total estimated value of a property development project when completed.
This is important for lenders as it helps them to assess the project viability and how much funding they will provide.
Lenders use the GDV to calculate the loan to value (LTV) ratio which is the percentage of the project total cost they will fund.
For example if the GDV is £1 million and the lender will fund up to 70% GDLTV, the maximum loan will be £700,000. This ensures their investment is proportionate to the project value and minimises their risk.
For developers understanding and accurately calculating the GDV is key when seeking finance.
A clear and precise GDV will increase the chances of getting the funding. By presenting a robust GDV, developers can show the project profitability and get the attention of funders.
Staged Payments
Ground-up development finance is paid out in stages and corresponds to specific milestones during the construction process.
This drawdown schedule of fund releases ensures that the funds are available when needed and in line with the project progress.
It also means the cost of borrowing is minimised, as interest is only charged on money lent.
The number of drawdowns or fund releases will vary from lender to lender and means cash flow needs to be well managed during the construction phase.
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Exit Strategies
Unsurprisingly, lenders will take great interest in how you plan on paying them back! This is your exit strategy.
There’s a few ways that this can be achieved, but the most common are:
Selling the units
Probably the most common option is to sell the units you have built.
The sales proceeds can then be used to gradually pay off the loan.
Retaining the units
Some developers will want to retain ownership of some or all of the new units.
A long-term mortgage will therefore be required to take out the development loan.
Development refinance
This probably isn’t going to be your exit strategy when first applying for development finance!
But it is a valid option.
Once the site is finished, or nearly finished, it is possible to switch funding from ground-up development to an exit loan.
Development exit loans are used quite often to reduce the cost of borrowing, while building in some extra time to sell all of the units or obtain a long-term loan.
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