Surprisingly, new commercial or residential construction projects are easy to find when the land that is being developed is already owned by those interested in building. These projects become even simpler when the planning permission has already been obtained, which also helps to add value to the land in the eyes of those interested in developing the property.
With these two items in place, the final component that developers need to consider is in what manner they are going to finance the project.
Property Type Determines Loan Type
Once the property is built, there are generally two options of how the property will be managed. First, the property may be rented to one or more tenants depending on the building type. In this case, a longer term loan may be required to help finance the facility while it is being occupied.
If the property is to be sold upon the completion of development, a short term or bridging loan is a much better option. If a bridging loan is chosen, an exit plan of when the property will be sold will need to be put into place. It is important to be realistic about the closing date and be conservative with any timeline estimates.
Using Bridging Loans for Construction Projects
Generally, new construction projects are funded through development finance but can also be funded through bridging loans. Bridging loans work for this type of development when funds are released in timed stages that are agreed upon before the loan is finalised.
Acquiring funding in stages helps to minimise high interest rates to the borrower and also helps to keep the project’s timeline on track through fund release at certain development milestones. Not only will funds be released at each milestone but the value of both the land and the property will increase at each of these points.
When is Development Finance Appropriate?
When using a bridging loan for construction projects, the amount of each funding advance is based on the current value of the land and property. This valuation process is sometimes difficult for developers to work with. Development finance, however, is tailored to be more flexible for different construction projects allowing developers to obtain financing specialised for their specific project.
Although bridging finance is a popular choice for developers who are looking to purchase, renovate, and sell properties for profit, development finance is an alternative that may be more suitable for specific projects.
Bridging finance and development finance are the most popular choices for funding new building projects but there are many different options available to finance these types of projects and the best choice will be determine by the unique project itself. If the choice is unclear, it may be in your best interest to consult with a professional finance broker.
EuroGuide’s finance professionals are on hand to answer all of your questions and can help to identify the right funding for any development project.