Laying the foundations for a successful construction project doesn’t just begin when the concrete starts flowing; a great deal of work goes into ensuring that a project will be able to move quickly and easily once work begins, and a lot of this happens before any work actually starts. There are many boxes to tick, many forms to fill out and plenty of paperwork to complete before ground can be broken, and developers often need to secure financial support during this process in order to ensure their project can begin on schedule. Obtaining pre construction finance is vital for developers because it supports them before their main sources of construction finance come online; just because work hasn’t started doesn’t mean there aren’t bills to pay.
Development finance is all about making sure projects are completed smoothly. By evening out the developer’s cash flow, lenders make sure that money is provided as and when it’s needed - a project that’s continually running into funding shortfalls will struggle to complete on time, and will consequently run over-budget as well. Pre-construction loans fulfil an important role in the overall financial architecture of a construction project because they release the burden of capital from the developer, enabling them to escalate other projects with their on-hand capital.
As with all financial products, pre construction finance isn’t free; the money will need to be repaid with interest, so it’s important that developers are certain they’ll be able to meet their obligations when the time comes. Because pre-construction loans are secured against property, the borrower could stand to lose their assets if they fail to repay the loan, and while this is a worst-case scenario, it’s important that anyone considering a pre-construction loan package consults a financial advisor before making any commitments.
Pre construction loans are used to pay for all the work that goes on before construction begins. While there may be no physical activity on the site, there can be a great deal of work going on as the developer seeks to obtain and enhance their planning permission for the building site, and there are many additional costs that may need to be met before work starts. The process of applying for planning permission is often far from straightforward and can take several months to achieve; during this time, work cannot go ahead. While most developers will have a financial solution in place to take care of the costs of construction, this won’t kick in until work starts; up until this point, they must finance all costs on their own.
Obtaining planning permission for a home extension or a single house is generally not too costly; depending on the size, a homeowner may have to pay anything from several hundred to several thousand pounds. A larger development, however, can cost a great deal more: planning permissions are costed by the total floor space taken up, at a price of £385 per 75 square metres. Above 3,750 square metres, this falls to £115 per 75 square metres up to a maximum of £250,000 (though there is also an additional set fee of nearly £20,000). This means that even a fairly small office building of just 2,000 square meters will cost £10,000 in planning permission alone, let alone auxiliary costs, while larger blocks can quickly cost more than a hundred thousand pounds.
Meeting these expenses is challenging for developers who are stretching hard to make their project as profitable as possible, and can easily lead to a breakdown in cashflow. A developer who spends all of their capital on preparing the way for a new project leaves themselves vulnerable and unable to adapt, so it’s important therefore for developers to use pre construction finance to meet these needs instead. While they’ll need to pay interest on this loan, it’s often beneficial to minimise the amount of capital used to finance a project, instead relying on the services of pre-construction lenders. This enables developers to stay flexible and to react to changes in the market, and many development finance lenders are able to keep ongoing costs to a minimum.
As mentioned previously, pre-construction finance is secured against property. Different lenders have different criteria for the projects which they’ll lend on; for instance, while some may happily provide money for security on a commercial property, the construction itself may need to be of residential property. In many cases, developers won’t be able to use their upcoming construction project as security for their loan; not only is there no property there to secure against, but they’ll likely have financial attachments already arranged for all stages of development.
Pre construction finance is therefore usually an additional form of finance that’s used as well as the central construction and development loans, and must be adaptable enough to work around the developer’s financial arrangements. Often, this means the developer will provide security in the form of a second property, if they already have an existing development they can securitise. Even if this development is still under finance, they can still provide a second charge security, and while most lenders won’t provide the same level of funding on a second charge, they may well still be able to meet the costs of pre construction work through a second charge loan alone.
Crucially, pre construction lenders understand their business and that of their clients. They know that property development demands a flexible, fast-acting attitude, and they are able to provide this. Especially when laying down the preliminary phases of a development project, it’s important for these lenders to be able to accommodate a wide variety of different needs, and to create bespoke lending solutions for each individual developer. Thanks to the experienced specialist firms that work within the pre-construction finance sector, developers can take advantage of loans that are designed to smooth out the difficulties of getting construction started.
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