What Is Commercial Development Finance?

Commercial development finance is a flexible, short-term lending option available to various entities—individual investors, corporations, limited liability partnerships, charitable organisations, and even pension funds. 

This financial instrument can cover:

  • Retail spaces
  • Industrial sites
  • Hospitality establishments
  • Educational institutions
  • Care facilities
  • Office buildings
  • Places of worship
  • Residential properties for resale or leasing

How Does It Work?

With commercial development finance, you’re not handed a lump sum; you get incremental funding at various project stages. The release of funds might be scheduled (say, every three months) or be contingent on project milestones.

The beauty of this loan type is its flexible interest. Interest accrues only on the funds you’ve withdrawn, making it a cost-effective choice. But remember, some lenders might charge you for the funds you haven’t utilised, so read the fine print carefully.

Every lender will ask for an exit strategy—either a property sale or refinancing via a commercial mortgage—before they agree to fund your project.

When Is It Most Useful?

This financing option is versatile and can suit various development objectives:

  • Acquiring new development sites while capital is committed elsewhere
  • Purchasing un-mortgageable properties for renovation or conversion
  • Securing properties at auctions for redevelopment and sale
  • Funding ‘Build to Let‘ projects
  • Supporting self-build ventures
  • Investing in commercial venues like pubs, hotels, and restaurants

Types of Commercial Development Finance

Building to Sell

In such scenarios, the lender’s main concern is how easily the property can be sold. Commercial properties are generally less liquid than residential ones, so factors like the property’s Gross Development Value and the expected time for a sale become crucial.

Building to Keep

When the aim is to hold onto the developed property, lenders shift their focus. They look at how rentable the property is and your ability to manage it financially once it’s let. Pre-lets can significantly boost your chances of securing a loan.

Building for Your Business

If the property development is for your business operations, lenders worry less about saleability or rentability. Their main concern is your capacity to transition into a commercial mortgage post-construction.

How Much Can I Borrow?

The amount you can borrow for construction can range between 60% to 100% of the total costs. This largely depends on the robustness of your business plan and your ability to negotiate. 

Also, these are influenced by individual lender policies and various determining factors:

  • Project Scale – The size and scope of your project often correlate with the loan amount, although larger projects also invite more scrutiny.
  • Loan-to-Value (LTV) – Generally, lenders offer an LTV ratio between 70-75%, but this could be influenced by additional factors such as your credit history or the project’s viability.
  • Gross Development Value (GDV) – Lenders assess the estimated value of your completed project to determine loan amounts. A higher GDV can often result in a larger loan.

GDV refers to the projected market value of your development once it’s fully completed. In commercial development finance, Loan-to-Gross Development Value (LTGDV) is a key metric that lenders use. It’s the loan amount expressed as a percentage of the project’s expected market value upon completion.

  • Credit History – A strong credit history may enable you to borrow more and potentially at better rates.
  • Exit Strategy – A well-defined exit strategy can affect how much a lender is willing to loan, as it offers assurance of your ability to repay the loan.
  • Interest Reserves – Your ability to cover interest payments during the project can also impact how much you can borrow.
  • Experience – Your track record in completing property developments can influence how much you’re able to borrow.
  • Fees and Rates – Don’t forget to factor in additional costs like upfront fees, valuation costs, and the loan’s interest rate type.
  • Loan Term – Typically, these loans are short-term, usually between 6 to 24 months, although some lenders offer longer terms.

What Documents Do You Need for Commercial Development Finance?

Preparation is important. Having the necessary documentation at hand can expedite the process and increase your chances of approval. Here’s what you’ll usually need:

  • Business Plan – A comprehensive business plan outlines your project in detail, highlighting the market demand, timelines, and financial forecasts.
  • Cash Flow Projections – Provide a detailed cash flow statement for at least the next 12 to 24 months to show how you plan to manage the finances during the development period.
  • Property Valuation – Lenders often require a professional valuation report of the property to understand its current worth and its potential value post-development.
  • Planning Permission – Evidence of planning permission or at least preliminary discussions with local authorities can show the lender that your project is viable and legal.
  • Personal and Business Financial Statements – Lenders will want to scrutinise your personal and business financial statements to assess your ability to repay the loan.
  • Credit History – Though not a deal-breaker, your credit score can influence the terms of your loan. Be prepared to discuss any financial issues you’ve had in the past.
  • Asset and Liability Statements – Listing your assets and liabilities gives lenders a fuller picture of your financial health.
  • Identification Documents – You’ll also need to provide standard ID verification, such as a passport or driving licence, along with proof of address.

Having these documents ready can smooth your path to securing the finance you need for your commercial development project.

How Your Income Factors In

Unlike personal loans, lenders won’t typically focus on your income when considering how much you can borrow for commercial development.

If you’re taking a loan for your own business, the focus will be on your potential for a commercial mortgage since that’s how the lender will likely get repaid.

What Rates Should You Expect?

If you occupy the property post-development, rates usually start at around 3.5% per annum. For projects intended to be sold or leased, you’re looking at interest rates between 7% to 11.4% per annum

Note that interest is often rolled up into the loan amount, so you won’t have to worry about monthly payments.

Additional Costs to Keep in Mind

While the loan itself is crucial, it’s important to budget for other expenses:

  • Arrangement Fee. This is a setup charge by the lender, typically ranging from 1-2% of the loan value.
  • Exit Fee. Not all lenders charge this, but many do. It’s a fee due when you repay the loan, generally between 1-2% of the loan amount or the Gross Development Value (GDV).
  • Broker Fees. If you go through a broker, you might also incur some additional charges. This can be about 1% of the loan amount.
  • Valuation Fees. A chartered surveyor will evaluate your project, and the cost of this service scales with the GDV of your scheme.
  • Professional Fees. Don’t forget about the fees for other experts like architects, quantity surveyors, and legal consultants. These can vary based on the complexity of your project.

Where to Find Loans for Commercial Property Development

When it comes to securing a loan for your commercial property development project, you have several options to consider. Broadly speaking, lenders for these loans can be classified into three main types:

High Street Banks

High street banks are the go-to choice for many because of their low rates. However, they’re generally more cautious, and you’ll likely find you need a larger deposit compared to other lenders.

Challenger Banks

These institutions are more relaxed in their approach, often requiring a smaller deposit. The application process can be simpler, but you’ll probably pay a slightly higher rate than at high street banks.

Specialist Development Lenders

These lenders cater specifically to commercial development projects. They often require a smaller deposit and can offer rates that vary quite a bit, ranging from very low to rather high.

Business Loan or Commercial Development Finance?

If your project is small, with a budget not exceeding £25,000, a business loan could be the better fit as you won’t need to provide any security. 

However, for larger-scale projects like buying land or renovating a building, commercial development finance is usually the better option. These loans are designed to be released in stages to cover the costs of your project.

In many cases, a commercial development loan is the starting point, which is then refinanced into a commercial mortgage once the development reaches a stage acceptable to more lenders.

Alternative Financing Options

Other options to ponder include:

  • Bridging Finance – This is a short-term loan similar to commercial development finance but with funds released all at once.
  • Mezzanine Finance – This can fill in financial gaps midway through your project.
  • Joint Venture Property Development Finance – Some lenders offer a profit-share agreement that can cover 100% of the required funds. This doesn’t require a deposit, but the interest rates are higher, and you’ll typically share between 40-50% of the profits with the lender.
  • Commercial Mortgage – While similar in some respects to commercial development finance, commercial mortgages are generally for already-built properties rather than funding a project from the ground up. They usually have a longer repayment term and are intended for properties that will generate income or capital gains. Commercial mortgages are generally less flexible when it comes to releasing funds in stages for development milestones.

The Bottom Line

To secure commercial development finance, you must be well-prepared, as the strength and credibility of your business plan and exit strategy are crucial. Even with a solid proposal, you may encounter challenges, as lenders can be demanding and market competition is fierce.

A development finance broker can help you most by taking the headache out of the process. Brokers know what lenders want and can tailor your application accordingly. They can even handle all the paperwork for you, making your life easier by sorting out the tricky bits so you can focus on your project.

If you’re keen on commercial property, get a broker on your side. Reach out to us today, and we’ll connect you with an expert who knows the ropes.