Development finance is typically available for terms of between nine and 30 months. Given the extended timeframes for many building projects at the moment, this leaves little time for schemes to be completed, marketed and sold within the initial term.
To avoid costly fees for late redemption of their development finance, many investors choose to refinance onto a development exit bridging loan to buy themselves more time. There are a number of advantages to doing this. As the development is usually completed, or at least nearing completion, it poses less of a risk to the lender and so development exit loans are usually charged at a lower rate than development finance, presenting an immediate financial benefit.
In addition, and particularly at the latter stage of a scheme, many developers are in a position where they are asset rich and cash poor. A development exit loan not only enables developers the time to complete the scheme for rental or give them more time to achieve the best sales price, but it also enables investors to release equity from the scheme to use towards future projects, empowering them to make the most of any new opportunities.
Once a scheme has been completed, the investor may choose to sell the units, hold on to them in order to let them out, or maybe even a combination of both. Timing is everything when it comes to investing and so the ability to have more control over when to make a sale can be a very powerful tool for developers.
One way of doing this is to use a Bridge as a development exit loan to refinance the scheme over the short term. Then, when the properties are ready, the developer can choose to switch all the properties onto a Buy to Let loan and let the properties to tenants, perhaps with the intention of selling at a later date. Or, if they choose, they could sell some properties now and switch some onto the Buy to Let loan, reducing the outstanding balance in the process.
The option to easily switch onto a term Buy to Let mortgage is particularly useful for developers who complete their schemes during a downturn in the purchase market when they might not achieve as much from the sale of a property as they would have hoped. By letting out the properties, rather than selling as soon as they are ready, developers have greater control over when they choose to sell, so can ride out any downturn and plan their exit strategy at a time when they are most likely to achieve the best price. Similarly, in a particularly strong rising market, there may be some benefit to an investor holding on to a property for longer, in order to realise the ongoing capital gains.
Some lenders, like Castle Trust Bank, are able to structure clever hybrid loans that enable developers even greater flexibility. For example, we worked with a broker to complete a £9.6m development exit loan, structuring a hybrid solution that combined a serviced loan and a bridge. The loan was secured on a block of 69 one- and two-bedroom apartments in a five-storey commercial to residential conversion in Birmingham. Constructed under permitted development, the scheme in Four Oaks, Sutton Coldfield has been valued at £13.2m and the LTV was 73%.
The loan was split at the outset between a bridging loan on some properties that were being marketed for sale and a five-year fixed rate loan with serviced interest on those that were being retained to let out. After nine months, the bridging loan was converted to a serviced loan, enabling the client the flexibility to choose whether to deleverage at this stage or to service the debt.
Development exit loans provide a sensible way for developers to reduce their interest payments, whilst buying themselves more time to maximise the sale price on their scheme, or complete the properties, ready to be let to tenants. Whether they choose to sell or to rent, this type of short-term loan is a great way for many investors to maximise the returns on their development investment.