Ground Up Development Finance: Building Success from the Foundations Up
Ground-up development finance helps investors buy land and build new properties; from the ‘ground up’.
This can include single houses, housing estates or commercial buildings. It’s a higher-risk area of property development, but can lead to bigger profits.
With proper funding and know-how, developers can turn empty land into valuable property, boosting returns in the ever-changing property market.
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What Is Ground Up Development Finance?
Ground-up development finance is a bespoke funding option for new-build construction projects.
It covers the entire process, from land acquisition to project completion.
This finance type is particularly well-suited for developers undertaking large-scale projects from scratch.
This style of finance aligns perfectly with the unique demands of property development. It’s adaptable to a wide array of projects, from residential estates to commercial complexes.
One big advantage is its flexibility. Lenders in this space understand the dynamic nature of property development and can tailor funding to match your project’s specific needs and timeline.
Why is ground up development considered riskier?
Ground up development is seen as riskier due to several factors:
- Longer project timelines increase exposure to market fluctuations
- Multiple stages where costs can escalate or delays can occur
- Reliance on various professionals and contractors
- Potential for unexpected issues with land or construction
- Larger capital requirements and extended periods without income
However, the potential for higher returns often balances these risks.
By creating value from the ground up, developers can earn significantly more than through other property investment strategies.
How Does Development Finance Work for Ground Up Projects?
Securing and utilising ground up development finance involves a streamlined process designed to ensure project viability and lender security.
The application process typically follows these steps:
- Initial assessment: Provide a project overview to your finance broker.
- Detailed proposal: Submit comprehensive plans, cost breakdowns, and projected returns.
- Lender evaluation: The lender assesses project feasibility and your development track record.
- Loan offer: If approved, you’ll receive terms and conditions for the loan.
Once approved, the funding structure usually comprises:
- Land purchase funding: A portion of the loan is provided for land acquisition.
- Construction phase funding: The remaining loan is released in stages as construction progresses.
- Project completion: Upon completion, you’ll either sell the property or refinance to repay the loan.
Throughout the project, the lender will conduct regular site visits and valuation reports to manage risk and ensure progress.
Let’s talk development finance!
How Much Can I Borrow?
Your borrowing capacity depends on several factors:
- Project location and type
- Total project costs (land and construction)
- Projected Gross Development Value (GDV)
- Your development experience and track record
Typically, lenders offer up to 70-75% of the GDV or up to 90% of total project costs, whichever is lower.
For instance, a project with a £5 million GDV and £3.5 million total costs might qualify for a £3.5 million loan (70% of GDV), leaving you to fund the remaining £1.5 million.
Experienced developers with strong track records may secure higher loan-to-cost ratios, sometimes up to 100% of build costs if they already own the land.
While higher leverage can reduce initial capital outlay, it also increases financial risk and borrowing costs. Always ensure a robust financial plan before committing to a high-leverage development loan.
Understanding Drawdowns
In development finance, ‘drawdowns’ refer to the staged release of funds.
As your project progresses through predefined milestones, you can request these drawdowns. This approach ensures you have the necessary funds when needed, while also managing the lender’s risk.
Typically, you’ll need to have a satisfactory site inspection or provide evidence of work completed to trigger each drawdown.
The number of drawdowns can vary, with some lenders setting a maximum, while others allow unlimited drawdowns but may charge a fee for each.
Repayment and interest options
Lenders offer flexible options to suit your cash flow.
You can choose to have interest ‘rolled up’ and paid at the end of the term, or service it monthly. The principal must be repaid in full at the end of the term, usually through property sale or refinancing. The method you use is called your exit strategy.
Read more: Exit Strategies for Property Developers
Development Exit Finance
Project delays or slow sales can put pressure on your development finance repayment timeline. In some cases this means that you won’t be able to repay the loan as agreed.
In these situations, development exit finance offers a practical solution by taking over the funding.
This finance comes with lower rates than your original development loan and provides valuable extra time to complete works or secure sales. It acts as a financial buffer, allowing you to repay your initial loan and transition smoothly to the final stages of your project.
Once your property sells, you can then settle the exit finance from the proceeds. This common strategy helps manage cash flow and reduces stress during the critical final phase of your development.
explore Development Exit FinanceSteps in a typical ground up development project
Market analysis and site selection
Begin by researching potential locations and market demands. Assess factors such as local property values, population growth, and economic trends to identify promising development opportunities.
Land acquisition
Once you’ve identified a suitable site, negotiate the purchase and conduct thorough due diligence. This includes reviewing title deeds, checking for any legal restrictions, and assessing the land’s development potential.
Planning and design
Work with architects and planners to create a design that maximises the site’s potential and meets local planning requirements. Consider factors such as sustainability, market appeal, and cost-effectiveness in your design choices.
Obtaining necessary permissions
Navigate the complex process of securing planning permission and building regulations approval. This may involve multiple rounds of applications, consultations with local authorities, and potential adjustments to your plans.
Securing finance
Approach lenders or investors with your well-prepared project proposal to secure the necessary funding. Be prepared to demonstrate the project’s viability, your track record, and a clear exit strategy.
Site preparation and groundwork
Clear the site, conduct any necessary demolitions, and prepare the ground for construction. This stage may involve addressing issues such as contamination, drainage, or challenging soil conditions.
Construction
Manage the main build phase, coordinating various contractors and ensuring work progresses according to schedule and budget. Regular site inspections and project meetings are crucial during this stage.
Finishing and snagging
Complete all interior and exterior finishes, and conduct thorough quality checks. Address any defects or incomplete work to ensure the development meets the highest standards before handover.
Marketing and sales/rental
Implement your marketing strategy to attract buyers or tenants. This may involve working with estate agents, creating show homes, or launching targeted advertising campaigns.
Project completion and finance exit
Finalise all legal and financial aspects of the project, including obtaining completion certificates and repaying development finance. Evaluate the project’s success and use insights gained to inform future developments.
How Long Does It Take To Arrange?
These types of projects require a fair bit of research and due diligence. Arranging ground up development finance typically takes 2 to 12 weeks, depending on:
Application completeness
Having all necessary documentation ready speeds up the process.
Project complexity
Larger, more intricate projects may require more extensive due diligence.
Lender processes
Some lenders have more streamlined procedures than others.
Key documents
- Detailed business plan and project overview
- Planning permission documentation
- Project costings and cash flow forecasts
- Schedule of works
- Details of your development experience and past projects
- Asset and liability statement
- Proof of identity and address
- Exit strategy details
To speed things up
- Prepare a comprehensive business plan with financial projections.
- Have all relevant documentation ready, including planning permissions and build cost breakdowns.
- Work with an experienced broker who understands the market and can match you with suitable lenders.
- Respond promptly to any additional information requests from the lender.
How does ground up development finance compare to a bridging loan?
Ground up development finance and bridging loans are both short-term property finance options, but serve quite different purposes.
Development finance is tailored for new-build projects, covering land purchase and construction over 12 to 36 months.
Bridging loans, typically lasting 3 to 12 months, address temporary funding gaps for property purchases or straightforward renovations.
One major difference is in fund release: development finance is drawn down in stages, while bridging loans are released as a lump sum.
Development finance often has lower interest rates but may involve additional costs like monitoring fees. The application process for development finance is more comprehensive, requiring detailed project plans and evidence of the developer’s experience.
What can a bridging loan be used for?Benefits of Ground Up Development Finance
Ground up development finance offers significant advantages for property developers aiming to maximise their market opportunities. Its primary benefit is access to substantial funding for large-scale projects, often challenging to secure through traditional lending channels.
The finance structure, with its staged drawdown system, works perfectly with the development process, ensuring efficient cash flow management throughout the project lifecycle.
Lenders in this space understand development complexities, offering greater adaptability to accommodate changes or challenges that may arise.
This flexibility, combined with the ability to take on larger projects, can lead to enhanced profit potential for developers. Additionally, many specialist lenders provide valuable insights and expert guidance, offering more than just financial support.
How 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.
