Commercial Development Finance: Funding Solutions for Property Developers
Are you a property developer with plans for your next commercial project?
Whether you’re envisioning new offices, retail spaces, or industrial units, commercial development finance could be the catalyst that brings your plans to fruition.
Our brokers are well-versed in the intricacies of commercial property development. Their specialised knowledge enables us to get the funding needed to turn your project into a success.
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What is Commercial Development Finance?
Commercial property development finance is a specialised funding option designed to support the construction or significant renovation of commercial properties.
This type of finance accommodates a wide array of projects, from constructing new office blocks and industrial units to transforming existing structures for commercial use.
Unlike standard commercial mortgages, which are typically used for purchasing existing properties, development finance meets the specific needs of construction projects.
It offers the flexibility and structure required to fund a project from inception or to undertake major renovations.
Key Features of Commercial Development Finance
Commercial development finance stands out from other forms of property finance due to several distinctive features:
- Loan amounts begin at £100,000, with no upper limit, catering to projects of all scales.
- Loan terms typically extend up to 36 months, allowing ample time for construction and initial leasing or sale.
- Funds are released in stages as the project advances, aligning with your construction timeline.
- Loan-to-Value (LTV) ratios for the initial site purchase usually fall between 55% and 65%.
- Loan-to-Gross-Development-Value (LTGDV) ratios often reach 60% to 65%.
- Some lenders offer up to 100% Loan-to-Cost (LTC), minimising the upfront capital required.
This structure allows developers to access substantial funding while managing risk for both the lender and the borrower.
Related reading: Loan to Gross Development Value: What is LTGDV?
Types of Finance
Commercial property development finance can be tailored to suit various project goals.
Let’s explore the main types:
Building to Sell
If you plan to sell the completed development, lenders will focus on the marketability of the units. They’ll consider factors such as:
- The projected Gross Development Value (GDV)
- The estimated time required for sale
- The demand for similar properties in the area
Keep in mind that commercial properties often take longer to sell than residential ones, so lenders will pay close attention to your exit strategy.
Building to Hold
For developers planning to retain the property as an investment, lenders will consider:
- The potential rental income of the completed units
- Any pre-let agreements in place
- Your ability to secure long-term finance once the project is complete
Pre-lets can significantly strengthen your application, demonstrating demand for your development before it’s even finished.
Building for Yourself
If you’re developing a property for your own business to occupy, lenders will focus less on immediate marketability or rental potential. Instead, they’ll consider:
- Your business’s financial health
- Your ability to secure a commercial mortgage post-completion
- The suitability of the property for your business needs
This approach can be particularly useful for businesses looking to create bespoke premises tailored to their specific requirements.
How Commercial Development Finance Works
Understanding how commercial development loans work can make for a smoother journey.
One big difference between other types of loans is that the money is handed over in stages.
The Staged Release Process
Unlike a standard commercial mortgage where you receive the entire loan amount upfront, commercial development finance is released in stages:
Initial release
This covers a percentage of the site’s value, allowing you to purchase the land or property for redevelopment.
Subsequent drawdowns
As construction progresses, you’ll receive further funds. These can be scheduled based on time (e.g., monthly) or tied to specific construction milestones.
This staged approach helps manage risk and ensures funds are available as needed throughout the project. Depending on the size of the project, a satisfactory site inspection may be needed prior to the release of each stage.
The Application Process
Securing commercial development finance involves several steps:
Initial enquiry
You’ll provide basic details about your project and funding needs.
Preliminary assessment
We’ll evaluate your proposal and provide initial feedback.
Detailed application
You’ll submit comprehensive information about the project, including plans, costings, and timelines.
Lender review
The chosen lender will assess your application, often including a site visit.
Valuation
A surveyor will provide an independent assessment of the project’s viability and value.
Offer
If approved, you’ll receive a formal offer outlining the terms of the loan.
Legal work
Your solicitor will handle the necessary legal aspects.
Completion
Once all conditions are met, the initial funds will be released.
Throughout this process, working with experienced professionals such as architects, quantity surveyors, and solicitors can significantly smooth the journey.
Who Can Apply for Commercial Development Finance?
Commercial development finance is available to a wide range of borrowers, including:
- Individuals
- Partnerships
- Limited Liability Partnerships (LLPs)
- Limited companies inc SPVs
- Pension funds
We can also handle applications from expats and overseas borrowers, making this a versatile funding option for diverse development scenarios.
Suitable Projects
Commercial development finance can fund a variety of projects, including:
- Construction of new office buildings
- Development of industrial units or warehouses
- Retail property construction or renovation
- Mixed-use developments combining commercial and residential elements
- Conversion of existing buildings to new commercial uses
Let’s talk development finance!
How Much Can You Borrow?
The amount you can borrow depends on several factors.
Lenders use several metrics to determine how much they’re willing to lend:
Loan-to-Value (LTV) for site acquisition: This typically ranges from 55% to 65% of the site’s value.
Loan-to-Gross-Development-Value (LTGDV): Lenders usually offer up to 60-65% of the project’s expected end value.
Loan-to-Cost (LTC): Some lenders offer up to 100% of the project costs, minimising your upfront capital requirements.
Factors Affecting Borrowing Capacity
Several elements can influence how much you can borrow:
Property type and location
Prime locations and in-demand property types may secure higher loan amounts.
Exit strategy
A clear, viable exit plan for repaying the loan is essential. Read more about Exit Strategies for Property Developers.
Your experience and track record
Proven success in similar projects can increase lender confidence.
Pre-lets
For build-to-let projects, having tenants lined up can boost your borrowing capacity.
Remember, while the maximum loan amount is important, it’s equally vital to borrow responsibly and ensure your project’s viability.
Advantages of Commercial Development Finance
Commercial development finance offers several benefits for property developers:
Access to substantial funding
With loans available from £100,000 and no upper limit, you can fund projects of any size.
Flexibility
The staged drawdown process matches funding with your construction timeline and helps to keep interest costs down.
Potential for higher returns
By leveraging development finance, you can take on larger projects with the potential for greater profits.
Tailored solutions
Unlike one-size-fits-all products, development finance can be structured to suit your specific project needs.
Compared to other funding options, commercial development finance offers advantages such as higher potential loan amounts than traditional mortgages and longer terms than bridging loans, making it ideal for substantial development projects.
Risks and Considerations
While dev finance can be a useful resource, it’s important to be aware of potential challenges:
Market changes
Shifts in the property market during your project could affect its profitability.
Project delays
Unexpected issues can extend your project timeline and increase the borrowing costs.
Exit strategy risks
If your planned exit (such as selling or refinancing) falls through, you may face challenges repaying the loan.
How Commercial Development Finance Differs from Commercial Mortgages
While both commercial development finance and commercial mortgages fall under the umbrella of commercial property funding, they serve distinctly different purposes and have unique characteristics:
Purpose
Commercial development finance is designed to fund the creation or significant renovation of commercial properties.
It supports projects from the ground up, including land purchase, construction, and major refurbishments.
In contrast, commercial mortgages are used to purchase or refinance existing commercial buildings that are already built, fitted out, and ready for occupation.
Project Stage
With commercial development finance, you’re funding a project that’s yet to be completed.
This might involve constructing a new office block, converting a warehouse into retail units, or extensively renovating an existing commercial property.
Commercial mortgages, on the other hand, are for properties that are already complete and typically ready for immediate use or rental.
Loan Term
The term of a commercial development finance loan is much shorter than a commercial mortgage.
Development loans usually run for 12 to 36 months, aligning with the expected project completion timeframe. Commercial mortgages, however, can extend over many years, often 15 to 25 years or even longer.
Funding Structure
Commercial development finance is usually released in stages as the project progresses, with regular valuations to assess the ongoing work.
Commercial mortgages provide a lump sum at the outset, as the property value is already established.
Risk Profile
Lenders view development finance as higher risk due to the uncertainties involved in construction projects.
This is reflected in higher interest rates compared to commercial mortgages. Commercial mortgages, dealing with existing properties, generally carry lower risk and thus often offer more favourable rates.
Exit Strategy
With commercial development finance, lenders pay close attention to your exit strategy – how you plan to repay the loan.
This could be through selling the completed development or refinancing to a commercial mortgage. For commercial mortgages, the focus is more on the ongoing ability to meet regular repayments over the long term.
When Would You Need Residential Development Finance?
The main purpose of commercial finance is to fund the building and renovation of non-habitable spaces.
Conversely, residential development finance is used for building houses, flats and apartments.
This can be just one house, a whole street or a housing estate.
explore Residential Development FinanceNearing project completion? Discover how development exit finance can boost your returns and fund your next venture.
Our guide explains how this flexible funding option can lower your interest rates, extend your sales period, and release vital capital.
Whether you’re facing unexpected delays or simply want to optimise your project’s profitability, development exit finance could be just what you need.
Learn how to transition smoothly from traditional development finance and maximise your project’s potential.
explore development exit financeHow Respect Capital Can Help
At Respect Capital, we specialise in helping developers secure the right commercial development finance for their projects.
Whether you’re browsing, researching or ready to go, we are here for you.
contact us- Access to over 200 lenders: From high street banks to private banks and specialist development finance providers.
- In-depth market knowledge: We understand the nuances of different lenders’ criteria and can match you with the most suitable options.
- Application support: We’ll guide you through the entire process, from initial enquiry to drawdown of funds.
- Ongoing assistance: Our support continues throughout your project, helping you address any challenges that arise.
FAQ
Yes, while experience does help, we can work with first-time developers who have a solid project plan and are working with experienced professionals.
In many ways development finance and bridging finance are very similar. Both have short terms and will let you buy and improve a property.
The biggest difference is probably scale. Development projects tend to be much larger, cost more and take longer to complete.
In addition a development finance facility will continue to help you as the site grows. With ground up development finance you will get an upfront payment for the land purchase, then stage payments once construction milestones have been reached.
The process typically takes 6-12 weeks from application to funding, depending on the complexity of the project and the lender’s requirements.
Yes, many lenders offer finance for mixed-use projects that combine commercial and residential elements.
It’s important to communicate with your lender if delays occur. In many cases, it’s possible to extend the loan term, although this may incur additional costs.
Alternatively you may want to consider development exit finance with a new lender.
While having planning permission will strengthen your application, some lenders will consider applications for sites without planning permission, especially if there’s a high likelihood of approval.
It rather depends on the type and size of project you have planned.
