Responsible Bridging on Development Sites

An ever-increasing trend we are seeing in the market today is clients on a bridging loan against a site they have purchased and gone on to secure planning permission or PD rights. This is all well and good but the rise in the number of cases where the bridge loan is too highly geared and therefore not refinance able is increasing.

When it comes to bridging on potential development sites, it is important for lenders to factor in the future development loan and not just offer maximum leverage without thoughtful consideration. This is particularly crucial when the client intends to build the scheme instead of selling it with planning.

An initial bridge is a vital part of the process with many sites still needing to obtain planning or PD before developing. Moreover, most development lenders would need to see either of these in place before securing a development loan against the site. However, it is important that those involved in the initial bridge process, consider the viability of the clients expected exit onto a development loan.

It is essential to have a clear strategy in place. This strategy should involve a thorough review of the potential development costs and potential GDV’s and work backwards to achieve an appropriate bridge loan.

Ideally, bridging lenders that also offer development loans are crucial in this process. These lenders have the expertise to assess the projected costs and returns of the development project, enabling them to provide suitable bridging loan terms.

 This can be especially important if the client has not yet done a full appraisal of the expected costs and GDV and therefore utilising a development lenders wealth of experience can really help determine not only what the bridge loan should be but also the viability of the scheme. This can sometimes be put on the back burner with pressure building from the vendor to complete quickly and therefore not allowing the client the time to properly assess the schemes viability.

If this is not done and the client just takes maximum leverage on the bridge, in some cases, the client may need to pay down part of the bridge loan or seek mezzanine financing further reducing the overall profitability of the scheme.

Utilising a lender that offers both bridging and development loans can provide a range of benefits for borrowers involved in property development projects. Some of the key advantages include:

Streamlined Process: Borrowers can transition from the initial bridge loan to the development loan seamlessly, avoiding the need to search for a new lender and go through the application process again.

Consistent Terms: Borrowers can benefit from consistent terms and conditions throughout the financing process. This can help reduce confusion and ensure clarity regarding the financial arrangements for the entire project duration.

Expertise and Guidance: Lenders who specialise in both bridging and development finance are likely to have deep expertise in property development projects. They can provide valuable guidance and advice to borrowers at every stage of the project, helping them navigate complex financial decisions and challenges.

Tailored Solutions: A lender can tailor financing solutions to meet the specific needs of individual projects. This flexibility allows borrowers to access the most suitable financing options based on their project requirements, financial situation, and timeline.

Risk Management: With a comprehensive understanding of the borrower’s financial profile and the development project itself, a lender offering both types of loans can effectively manage risks throughout the financing process. This can help mitigate potential challenges and ensure the successful completion of the project.

Cost Efficiency: Combining bridging and development loans from the same lender may result in cost efficiencies for borrowers. They can benefit from  potentially using the same professionals or even in certain circumstances the same reports and reduced fees lowering the overall financing costs compared to working with multiple lenders.

Relationship Building: Building a long-term relationship can be advantageous for future projects. Establishing trust and familiarity with the lender can facilitate smoother transactions, quicker approvals, and potentially access to additional financing options in the future.

Leveraging the services of a lender that provides both bridging and development loans can enhance the success and profitability of their projects while navigating the complexities of property development financing with confidence.

It is worth noting that in a market with rising construction costs and GDV (Gross Development Value) volatility, it has never been more important to thoroughly assess the entire life of the transaction rather than focussing on the initial loan. Moreover, all lenders should be providing a responsible approach to any terms they provide a client and have clear and defined exits available to move the client onto.

By focusing on responsible bridging on development sites, lenders can help ensure that developers have the necessary financial support at each stage of the project, while also considering the long-term viability and profitability of the development. This approach promotes sustainable and responsible development practices in the industry.

In a market where clients are having to pay more to secure the right site, the need for maximum leverage has never been greater but clients, brokers and lenders alike need to consider the end goal, it is not to secure the site but actually develop and successfully exit the scheme whilst making a profit.

Share: