A guide to commercial property development finance

Understanding commercial property development finance

Commercial property development finance provides the funds for property developers to purchase and develop business premises to ultimately sell or rent commercially on completion.

The funds can be used to pay for land and building and development costs as well as legal and other administrative fees that are associated with the process. This type of finance is typically offered by lenders on a short-term basis of between 12 and 36 months.

How does commercial property development finance work?

Financiers will estimate the value of the completed project and offer a loan based on that and other factors, including the developer’s experience. Funds are released in stages so that if you’re using the financing to purchase land, the lender will release this first.

Property development loans are usually paid back once the project is complete, with interest generally being charged only on those funds released rather than on the entire loan.

What do commercial lenders consider before sanctioning a property development loan?

• Gross Development Value (GDV): GDV is the projected value of a completed property development. It highlights how much the property is likely to be worth on the open market and is a key figure for lenders and borrowers alike.
• Current site/property value: commercial lenders will consider the location and cost of purchasing the existing property, as well as whether planning permission is required/has been obtained
• Total build and development costs: a full breakdown of development costs and professional fees will be required
• Details of personnel involved in the project: this includes the main contractor and project manager, as well as architects and engineers
• Previous experience in development: your previous experience as a commercial property developer will be taken into account, and the success of any former projects, if appropriate
• Loan to GDV: the ratio of your desired amount of funding to the Gross Development Value of your project is a key element when sanctioning a loan
• Plan for your project and how you intend to exit: your project timeline is taken into account and how you’ll repay the finance when it’s complete

What are the advantages and disadvantages of business property development loans?

The staged release of funds means that financing is made available as you move through the development project so you only pay interest on the amount received. Interest can also be added to the loan in some cases, so it doesn’t become payable until the project is finished.

A further benefit is the speed with which this type of funding can be secured. It’s generally fast to obtain and so provides the momentum you need to push your commercial property project forward.

A potential disadvantage of commercial property development loans is that some lenders charge higher interest rates. This is typically due to a range of factors, including the high loan amounts provided and the speed with which they’re made available to commercial borrowers.

To find out more about funding your commercial property development, please get in touch with us at UK Business Finance. We cover the whole of the market and can ensure you have access to the best deals.