The Brief

One of our clients had started a development of residential houses, using his incumbent high-street bank for development finance. The low loan-to-value loan, increasing construction costs and monthly interest payments was putting pressure on their cashflow, leaving them with a funding gap during the programme of construction where they required additional funding.

The Challenge

Due to increased labour and material costs, funding gaps in development finance have been very common recently, leaving developers in tight situations where they need to find additional cash to complete construction. Once a development has started, and especially if costs have risen, it is very difficult to get second charge “mezzanine finance” against the development site. The developer we worked with in this situation thought they did not have any other property or assets they could use as security for loans.

The Solution

Breadalbane reviewed the development costs and programme to hep asses the likely funding gap and duration. Although the developer did not have any investment properties, they did have a significant amount of equity within their home. Breadalbane were able to get an unregulated bridging loan secured on a second charge against their home, that had rolled-up interest so there was no additional monthly repayment burden. When the exit of the bridging loan is very certain, using a home as security is a viable option. Breadalbane could have provided a higher LTGDV development finance loan that would have covered the higher construction costs.

The Outcome

The developer was able to complete the development using the second charge bridging loan to cover the funding gap and repaid the loan on the sale of units. Breadalbane had helped assess an appropriate timescale for the loan to ensure there was no time pressure on the exit. The development finance market has changed a lot recently with the increase in interest rates, and there are now products that go as high as 75% LTGDV which covers the increase in land, construction, and finance costs. The margin developers are making is lower than it has been, but in cases where there is already significant investment in a site, the best option for a developer is to complete and move on to the next project, even with a reduced profit.