In this article for Business MoneyFacts, Hope Capital explains what development exit finance has to offer and why it has grown so much in popularity following the dual impact of Brexit and Covid-19 on the property market.
What is development exit finance?
Simply put, development exit finance is a short-term loan, which is normally used to replace an existing loan that has been used to develop a property or multiple properties. Similar to a bridging loan, development exit finance provides the same features, i.e. access to short-term finance which is provided extremely quickly to meet the individual needs and requirements of the borrower.
Typically, lenders only provide development exit finance to projects which have reached the practical completion stage, or where the asset is at least wind and watertight.
One of the main benefits of development exit finance, is it provides the borrower with additional time and can relieve any pressure to pay outstanding capital back to the lender if they are unable to do so on time. Often, once a project is complete, there will be a limited amount of time to sell the asset(s) and subsequently, pay back the loan. Development exit finance can therefore be used to raise capital quickly and provide the borrower with some much-needed breathing space to sell the property.
Who uses it?
Development exit finance is usually used by experienced investors and developers who have completed their development and are simply waiting for it to sell, so they can repay the money they have borrowed. Property investors and developers utilise development exit finance, so it reduces the financial pressure and potentially increases their cash flow which can then be put to use on their next project. In addition, a development exit bridge might also be a more cost-effective form of funding compared to the borrowing to actually develop the properties.
With the current marketplace being highly buoyant, it is vital investors and developers take advantage of opportunities and be flexible if an investment project is to succeed. In the current economic climate, with the dual impact of Brexit and Covid-19, both new and experienced investors and developers are facing set-backs due to demand for building materials and labour. Many developers unfortunately at times, find themselves in a position where their current loan is coming to an end, however they have not managed to complete the sale of their development on time. For example, the implications of the various lockdown periods as a result of Covid-19, has meant that many projects have been set back, which is mainly due to there being a limited supply of building materials available and a huge demand on services for property purchases with the stamp duty suspension.
An important factor when a lender considers releasing funds is that the client has a realistic exit strategy in place, which is how the loan will be repaid at the end of the term. In the current buoyant housing market, sale of the properties is typically a solid exit strategy. However, if the exit strategy is not achieved, the borrower will need to be able to react quickly and flexibly to the changing situation, such as refinancing the existing units on to a long-term solution.
Why do people use it?
Development exit finance is designed for all property types, including for both residential and commercial purposes and is suitable for borrowers in a range of situations.
As a way of an example, an investor may have purchased a plot of land, with planning permission to build a number of residential properties. The investor may have taken out a development loan to fund the building works and ultimately generate a profit once completed and sold. However, once the development works have been completed and the properties go on the market for sale, the investor may be in a situation where they have not sold all the properties prior to the end of the development loan term and therefore are unable to pay back the loan they borrowed in time.
By the investor switching to a development exit loan, the borrower can then extend the marketing and sales period without any time pressures, at prices they are more willing to accept. Furthermore, development exit finance can be used to reduce overall costs and improve profit margins.
Why is it needed?
With there being a sharp rise in property prices and it currently taking longer for sales to be completed, investors and developers are eager to find a solution, so they can ensure their investment plans keep moving.
Investors and developers tend to rely on bridging finance to fund a project, whether that involves covering the cost of building or renovating a property. However, when the sale stalls and the deadline to pay back the loan is missed, this has a huge impact on the profitability of their development, if they are not in a position to tie up the loose ends of their existing finance obligations.
Ultimately, given the above and current climate, it is very likely the demand for development exit finance is set to continue indefinitely.
In summary, reasons investors and developers should consider using development exit finance are when:
- The loan period is reaching an end and the sale of the development will not be completed in time.
- The borrower is looking to move onto a lower interest rate.
- Additional time is needed, to accommodate final-finishing and marketing to proceed successfully, ensuring the best financial outcome can be achieved.
- The borrower is looking to release funds to invest in new projects.