Development Exit Finance
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Development Exit Finance
Scott West explains development exit finance and when this is important.
What is development exit finance?
Development exit finance allows you to finish building a project and switch the finance over, away from relatively expensive development finance to a more cost effective option.
That gives you then time to either refinance onto a Buy to Let or to sell the property, if that’s your plan. Development exit finance is usually a bridging loan to repay the development finance. It then gives you breathing space to figure out the exit strategy from there.
What type of loan are development exit loans?
More often than not, you would use a bridging loan. They are termed development exit products, but for all intents and purposes they are bridging loans. There are some examples where you could go straight to a term loan or a standard Buy to Let loan. But most commonly you use a bridging loan option.
Who can take out development exit finance? Can you lend to first time developers?
Anyone can take out development exit finance, if you’ve finished a development. That’s their sole purpose. The criteria will be the same as for people using bridging loans.
The property needs to have been completed and have a valuation that stacks up with the loan you need to achieve. So the gross development value for the project and the development exit finance itself should match closely to the original development loan – unless there have been wild market changes. If those all stack up, your exit should be absolutely fine to achieve.
Why would I look to take development exit finance?
It really depends on whether you have time left in your original product and whether that lender had included time for you to achieve your exit.
If the exit was always going to be sale, they might insist that you switch over to development exit finance. But if you agreed that the exit strategy would be to keep the property and switch it over to a Buy to Let mortgage, they might have built a bit of time in for that.
More often than not, you will need to switch – your lender won’t have included time at the end of the product. From a cost perspective, the difference can be quite dramatic. It’s beneficial to switch over, as it should save you money.
When is development exit finance used, and when should I start looking for development exit finance?
It’s most often used in a scenario when you have definitely agreed that sale will be your exit. In terms of when to start looking, I would say speak to your broker fairly early in the process.
We need to know that timeline and we can obtain some fairly indicative terms upfront. Then, as we get to maybe three or four months from the end of the project, we will really ramp it up, start to get those terms formalised and get the process underway.
You don’t want to be chasing your tail at the end of the deal. Don’t put the last nail in and ask your broker for an exit tomorrow. It doesn’t work. For your own peace of mind, allowing preparation time is easier.
What costs do we need to consider when looking at development exit finance?
Costs are very similar to bridging loans, which we’ve covered before. Almost certainly it will be a different lender, so you will need to pay a new valuation fee and new legal fees.
There’s quite likely to be an arrangement fee to the new lender and a broker fee. The same fees go across most transactions – like Buy to Let and residential mortgages.
In terms of rates, it should be cheaper than your development loan, but rates can vary from 0.4% or 0.5% up to 1.2% a month, [podcast recorded in November 2023]. It depends whether it’s a residential or commercial project, and also what the location, value and Loan to Value ratios are as well. If the project costs have overrun and you’re now at a very high Loan to Value, that will impact the rate too.
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How much can I borrow with development exit finance?
It’s usually 70% Loan to Value, but there is some flex on that. If the agreed exit is a sale, the lender might give you 75% or slightly more, because the exit doesn’t need to be contained to a normal Buy to Let mortgage. Those would be limited to 75%.
With a sale, the lender knows they can recoup their costs. If you’re going down the refinance option, you’ll be limited to 65% or 70% of the final value at this point. It’s simply because when you try to exit onto the Buy to Let mortgage, there needs to be enough money to cover it.
How will my maximum loan be calculated?
As per a bridging loan, it won’t be calculated on the rental income. It will be limited by Loan to Value in the property. We need to consider that if you are retaining the property, your Buy to Let mortgage will fit.
Your broker will be ready to give you some rental calculations to show you maximum borrowings for Buy to Let. You can then check the balances on those versus the development exit.
Do I have to make monthly payments?
No. Interest will be retained or rolled up, depending on your bridging lenders preference. There are some options where you can service the interest, but you need to demonstrate affordability for those. It can be quite messy, so only a few lenders will do that. It’s almost always retained.
What information would I have to provide to get development exit finance?
It’s the standard package, really, your ID, proof of address, bank statements and credit report. For the property itself, it’s a valuation report to ensure the property meets the requirements for the lender.
Will a valuation be required?
Yes, absolutely. The only exception to that might be if the development exit finance is being done by the same company as the original development finance. In that case they may allow the product to switch over immediately, without a valuation in the middle.
But the likelihood is they would still send out someone to check that the property is finished and meets their expected valuation.
How will my project be valued if it’s part complete?
You wouldn’t really be using development exit finance if the development’s not finished. In the event that you need to borrow more money but the property isn’t complete, we would look at using something like mezzanine finance or capital raising on other assets. The development exit product wouldn’t be suitable for that.
What happens when I start selling the property or properties?
This applies to people who are building more than one property on a particular site. As an example, let’s say you’ve built four houses on a plot. When you sell the first one, the proportionate amount of the debt is repaid.
Let’s say all four houses are worth a total of £1 million and you’ve got £500,000 of debt on them. They’re at 50% Loan to Value, so you sell the first house for £250,000 and pay off £125,000 of the debt. You proportionately pay down the debt as you sell the assets – that’s the most common way of doing it.
How long does it take to arrange development exit finance and how long does it take to complete?
It’s similar to a bridging loan process. They can be achieved as quickly as two or three weeks if we really put a rush into it. More often than not, people allow four or five weeks.
That allows comfortable timings for evaluations and legals and for your own review of documents and terms.
What happens if I repay the development exit loan early?
Most of them don’t have penalties, because they are bridging loans. If you pay it back early, there’s a refund on the interest you haven’t used. The lenders retain six months or 12 interest upfront depending on the term – and you only pay for what you use.
So if you repay early, the gross loan you pay back should be smaller than the amount you took out in the first place. There shouldn’t be any penalties for most lenders.
What are the advantages and disadvantages of development exit finance?
The advantages are that it gives you time to resolve your strategy – the sale or refinance onto a Buy to Let mortgage. It should be cheaper than the development loan.
If sale is your preferred option, your development loan probably doesn’t have a great deal of time left on it. But the sale of multiple assets might take you six or seven months, during which you don’t want to be sitting on the development loan paying quite high interest rates. It would be better to switch over to a bridging loan and give yourself breathing space to sell the properties as you need to. You will have a better chance of achieving the maximum value for them, as well.
The downside is that obviously it is another refinance. If you plan to retain the properties and go from development to Buy to Let, this product sits in the middle. There are extra valuations and extra fees to pay so it can seem like a costly step, but most of the time it’s a necessary one that will ultimately make things easier.
How can I apply for development exit finance? Should I use a broker or go directly to a lender?
I have a slight bias! I would always suggest you use a broker for anything that isn’t a standard high street mortgage. You can apply for them directly, some lenders will let you do that, but a broker will have a wider view of what’s being offered.
We will look at the terms and the appetite and could potentially negotiate more favourable terms – or just make the product more suitable for you. A broker will always benefit you when it comes to these sorts of complex transactions.
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