Feb 05, 2021
Usually, real estate developers and builders depend on sales to finance their next project. Other times, these developers and builders resort to crowdfunding, joint venture funding, online funding and real estate lending to secure funds for their upcoming project. However, suppose a real estate builder does not wish to opt for a regular loan or secure funding through investors and high net individuals or companies. In that case, there is always the option of a bridge loan and a development exit finance loan. If you are a property developer raising finance for property development, here is everything you need to know about exit facilities and bridge facilities while securing property development finance.
What is a bridge loan?
Simply put, a bridge loan is a short term loan that is used to finance property development before the sale. In the case of bridge loans, a property is often kept as collateral against the loan, and the total amount of the loan is calculated based on the full value of both properties, i.e. the value of the collateral property as well as the value of the property that is yet to be developed.
There are multiple types of bridge loans. A closed bridge loan has a fixed date of repayment. Whether the project has been completed or not, the developer needs to repay the loan by a certain period. Due to this, the interest rates of closed bridge loans are usually lower. On the other hand, an open bridge loan is one that has no fixed date of repayment. But, it is traditionally supposed to be paid within 12 months from taking the loan. In this case, the loan interest is usually deducted from the lender’s total loan amount by the lender as security or collateral. Since the payments are flexible in nature, the interest rate is generally higher than that of a closed bridge loan.
There is also something known as a first charge bridging and a second charge bridging. A first charge bridging is when the property that has been set as collateral is used to repay the lender if there is any default in payment. In case of default, the lender has every right to repossess the collateral property and even sell it to acquire the funds. In the case of second charge bridging, a second loan sits behind the existing mortgage or current loan. If there is equity left in the property to secure a loan, then a second charge can be taken out, known as second charge bridging.
What is an exit facility?
An exit facility or a development exit finance loan is a short term property loan that is used to repay a more expensive property development loan on completion of the project. Simply put, development exit finance loan is a loan that is used to repay an outstanding loan against a more expensive property. This loan can also be used to release capital from a completed development before the sales start to allow a developer to move on to the next project without worrying about the capital. Alternatively, an exit facility can also reduce the cost of finance to a much lower rate.
Usually, the development exit finance loan is around 80 per cent of the gross development value. One of the most significant benefits of the exit facility is that it allows developers and builders to free capital which can be used to provide funds for additional upcoming projects. Also, since this is essentially a form of a second loan, it allows builders and developers to refinance their current loan in such a manner that they can secure a lower rate of interest. And, since the interest can either be paid monthly or at the end of the loan period, developers have the liberty to make interest payments as per their convenience.
To know more about property development finance options such as exit facilities and bridge facilities, get in touch with real estate lenders today.