Property Development Loans – How Much Should You Ask For?

A property development loan will almost certainly be needed when you are starting on your development project. If you are doing this for the first time, you will obviously be aware of this. What won’t be so easy for you to figure out is just how much to ask for.

However, knowing how much to ask for when looking for property development loans is absolutely crucial. If you find yourself with a shortfall when your project is well under way, you will land yourself with severe problems.

Of course, you are very unlikely to receive 100 percent of your project costs, especially if you are a newcomer. But any lender you approach will certainly require that your project is fully and accurately costed before they decide how much to lend you.

So how do you work out the costs of your project? You need to ensure that all these factors are included, otherwise you risk being severely under-funded.

Obviously, the first factor is the price of acquiring the land and/or building you want to develop (including stamp duty). But don’t fall into the trap of thinking that this is all you need to borrow for!
Unless you are experienced in property development, you will be very well advised to hire an experienced project manager to help you estimate your costs, and to oversee the project. Of course this person’s fee will be added to your project costs but it will save you money in the long run.
Costs of materials and labour for the project. Your project manager will help you estimate these.
Fees for other professionals – architect, surveyor, valuer etc. You will need to obtain quotes from each of these to add to your property development loan request.
Contingency fund. It’s NOT a good idea to assume you can get by without a fund in hand for unforeseen expenses! There are so many unpredictable things that can happen – from unexpected snags being found in the land you have acquired, to one of your subcontractors going out of business. Allow at least 5 per cent of your total project costs. Some allow up to 25 per cent.

When you apply for your property development loan, you should have all these costs broken down in detail. It will help to convince the lender that you are businesslike and that you have thought through your project, and will also help them to estimate the potential profitability of your development scheme. This could make all the difference to whether the answer is “yes” or “no” – AND, if “yes”, to how much you actually get!

E Berry May 2008

Please note that the FSA do not regulate commercial loans or commercial mortgages

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