Firstly, lets highlight the similarities in a bridging loan and a development finance loan – they are both secured against either land or property and they generally have similar terms (short term facilities). That’s about it!
It appears that more and more professional landlords are diving into the world of property development and by default requesting a bridging loan facility. Perhaps this is what they are more familiar with? Perhaps they have used one for an auction purchase, released equity for a short-term need or undertaken a small flip bought at BMV with a light refurb (under £20k) often classed as a ‘light refurb’ bridge.
Don’t get us wrong, there is certainly a need for bridging loans from a developer’s perspective too i.e. if you need to quickly release funds from a property for a deposit, perhaps buying land pre-planning or even the more recent term require a ‘developer exit loan’ (which essentially is a bridge) then yes, a bridging loan will be sought over a development loan.
But a bridging loan should not be confused with a development loan. The key differences are:
1) the security will be changed (are you adding value to the land or property)
2) experience (who will be undertaking the works)
3) loan metric (one is based on LTV and the other on GDV)
A bridging loan is very transactional, I need X for Y, over 12 months etc. Very straight forward with no material change to the land/property. The loan is provided in one upfront lump sum on completion and based on the current value of the asset (hence based on LTV).
With a development however you will be looking to ‘develop’ / change the security over the loan term. You will receive the loan in stages, in arrears, as and when each stage completes. The overall loan is therefore assessed based on GDV instead of LTV, as more value is added at each stage, the loan metric follows the GDV assessment.
You might be thinking, why include who’s doing the works if, on the smaller projects, the developer has the funds to support the works and purely requires £x to help contribute towards the purchase? Reason being, the developer is changing the lender’s security, so they will want to know who will be undertaking these changes. Always putting yourself in the lender’s shoes, even if you had the first charge security as part of the loan agreement, would you want an inexperienced individual changing the security? Albeit, the intention is to add value, the risks are greater; if something were to go wrong, this could result in more damage / rectification costs for the lender should they need to repossess.
A development will need to be planned, managed and effectively sold.
If you are an experienced builder for example, in the main, a lender would still class you as inexperienced in developments. Even though you have experience in building, you don’t necessarily have experience in taking a development from start to finish i.e. the responsibilities involved from purchase to sale. Your starting point would be quoting for the work and finishing with getting paid for the job undertaken.
Bridging is assessed much more on the asset / valuation, opposed to a development where the loan is equally, if not more, assessed on the applicant and team undertaking the works. You would rather support an experience good track record developer on a not so good project, opposed to a good project but inexperienced developer!
Aside from understanding how the development will be delivered i.e. via an established contractor under a JCT contract or via the developer themselves as the builder, employing sub-contractors – other factors need to be considered in the development process – the cost of construction, type/source of materials, risk of cost overruns, potential delays that may occur, what level of contingency has been provided, planning in place etc.
The complexity involved with development finance does not compare to that of a bridging facility and likewise, the formalities in the due diligence process, for all parties, is that much greater given the many factors involved with the development process. The key points to remember: are you changing / adding value to the security and are the people undertaking these changes experience – if the appraisal stacks up, there will always be solutions available to find.
It appears that more and more professional landlords are diving into the world of property development and by default requesting a bridging loan facility. Perhaps this is what they are more familiar with? Perhaps they have used one for an auction purchase, released equity for a short-term need or undertaken a small flip bought at BMV with a light refurb (under £20k) often classed as a ‘light refurb’ bridge.
Don’t get us wrong, there is certainly a need for bridging loans from a developer’s perspective too i.e. if you need to quickly release funds from a property for a deposit, perhaps buying land pre-planning or even the more recent term require a ‘developer exit loan’ (which essentially is a bridge) then yes, a bridging loan will be sought over a development loan.
But a bridging loan should not be confused with a development loan. The key differences are:
1) the security will be changed (are you adding value to the land or property)
2) experience (who will be undertaking the works)
3) loan metric (one is based on LTV and the other on GDV)
A bridging loan is very transactional, I need X for Y, over 12 months etc. Very straight forward with no material change to the land/property. The loan is provided in one upfront lump sum on completion and based on the current value of the asset (hence based on LTV).
With a development however you will be looking to ‘develop’ / change the security over the loan term. You will receive the loan in stages, in arrears, as and when each stage completes. The overall loan is therefore assessed based on GDV instead of LTV, as more value is added at each stage, the loan metric follows the GDV assessment.
You might be thinking, why include who’s doing the works if, on the smaller projects, the developer has the funds to support the works and purely requires £x to help contribute towards the purchase? Reason being, the developer is changing the lender’s security, so they will want to know who will be undertaking these changes. Always putting yourself in the lender’s shoes, even if you had the first charge security as part of the loan agreement, would you want an inexperienced individual changing the security? Albeit, the intention is to add value, the risks are greater; if something were to go wrong, this could result in more damage / rectification costs for the lender should they need to repossess.
A development will need to be planned, managed and effectively sold.
If you are an experienced builder for example, in the main, a lender would still class you as inexperienced in developments. Even though you have experience in building, you don’t necessarily have experience in taking a development from start to finish i.e. the responsibilities involved from purchase to sale. Your starting point would be quoting for the work and finishing with getting paid for the job undertaken.
Bridging is assessed much more on the asset / valuation, opposed to a development where the loan is equally, if not more, assessed on the applicant and team undertaking the works. You would rather support an experience good track record developer on a not so good project, opposed to a good project but inexperienced developer!
Aside from understanding how the development will be delivered i.e. via an established contractor under a JCT contract or via the developer themselves as the builder, employing sub-contractors – other factors need to be considered in the development process – the cost of construction, type/source of materials, risk of cost overruns, potential delays that may occur, what level of contingency has been provided, planning in place etc.
The complexity involved with development finance does not compare to that of a bridging facility and likewise, the formalities in the due diligence process, for all parties, is that much greater given the many factors involved with the development process. The key points to remember: are you changing / adding value to the security and are the people undertaking these changes experience – if the appraisal stacks up, there will always be solutions available to find.
