Property development finance tends to be released via stage payments and not in one go as you will find with other types of finance. Development finance lenders will constantly want to be assured that there is enough value in the development project as well as funds being used as agreed.
The guide below will provide more information on how it all works.
Securing the project site
The lender will normally release an amount upfront to permit the purchase to be completed. This will generally be about 65-70% of the present value of the project site. Any interest and fees will have already been deducted from that amount which means that the remaining amount will solely be the net loan.
Accuracy of Costings and Build schedule
The accuracy of the costings and the build schedule are critical for correctly forecasting cash flow. This is especially the case where funds are tight. Although lenders are going to be delighted to release equivalent amounts monthly, you may need amounts to be given in different proportions depending on the needs of the project. As such, construction can occasionally stop as finance is being waited on.
On the other hand, there will be months where your spending will be less, money will be drawn that is not required. This may be just as big a issue, as drawing down too much cash, too fast will lead to more interest being paid, reducing profit margins of the development project.
Managing The Cash Flow Correctly
Cash flow is vitally important in managing a development project. It is usual for individuals to focus on the initial deposit needed to purchase the site and at the same time whether the loan meets their needs. However, keeping the cash flowing throughout is equally as important. To achieve this, you will need to ensure that your project follows a schedule of works and that this is supported by a cash flow forecast.
By doing this, you will be able to assess exactly when cash will be needed. This, in turn, will prevent any possible future problems later on and is much more useful than relying on a draw down schedule set out by the lender.
As such, the main factor in managing a development project is cash flow. Maintaining cash flow during the construction will also greatly reduce any delays or errors.
By following this advice, you will have the ability to judge precisely when money is going to be necessary for your development project.
Payments are generally discharged at agreed stages during construction allowing work to continue once each phase of work is signed off. A monitoring surveyor who is instructed by the development lender to make sure the project is on track will do the sign off at each stage.
The background checks normally include what work has been completed, both concerning what was previously agreed in the build schedule, alongside the quality of the work completed and cost management.
If disagreements arise when comparing the work completed with the build schedule, then stage payments may be postponed. The purpose is always to make sure that the stage payment is made on time and construction is not disrupted because of a delay in obtaining funds.