What is exit finance?
Property development “exit” finance is a type of specialist finance used to repay any outstanding development finance on a construction, and get the property ready for market.
Similar to a property bridging loan, this type of development finance is short-term and is normally provided for a period of 3 to 18 months. It is intended to be repaid upon the sale or refinance of the completed property. They are usually offered at a lower interest rate than standard development loans because they are lower risk to the lender.
What are the benefits of exit finance?
There are a few reasons you might need development exit finance.
- Your existing property development finance arrangement is coming to an end, but the property isn’t quite ready for sale and repayment. An exit loan can buy you more time to sell your property and remove the time pressure which may force you into quick and less profitable sales.
- Exit finance can be used to reduce costs at the end of a project. Exit finance comes with less risks to the lender so will usually be offered at a lower rate, providing a low-cost financing option at the end of a project. The original development loan can be repaid and replaced with lower-cost exit funding.
- Exit finance allows you to release capital before the sale of a project. These funds can offer a low-cost way to line up the next project and keep your cash flow moving.
How much does exit finance cost?
Exit finance is usually at a lower cost than standard development finance because the risks to the lender are smaller. The rate you are offered will depend on the loan-to-value (LTV) ratio, your exit strategy and the length of the loan.
Many lenders will offer rolled-up interest payments, meaning interest won’t need to be paid until the end of the loan. No monthly payments helps to keep cash flow fluid during a project.
How does Exit Finance work?
There are a range of criteria that will be part of an the “Exit” finance process, these include:
- Risk Assessment: Lenders providing development exit finance will conduct a thorough assessment of the project’s viability, the developer’s track record, and the property’s potential market value upon completion.
- Security and Collateral: Lenders may require the property itself as collateral, along with personal guarantees or other assets from the developer.
- Interest Rates: Interest rates for development exit finance can vary widely depending on factors such as the perceived risk of the project, and prevailing market conditions. They are often higher than traditional mortgage rates.
- Loan-to-Value (LTV) Ratio: The LTV ratio is a crucial factor in determining the amount of financing a developer can obtain. It represents the percentage of the property’s value that the lender is willing to finance. Lenders typically offer a percentage of the projected post-development value.
- Exit Strategy: Lenders will want to know how the developer plans to repay the loan. This could be through the sale of the property or through long-term financing, like a mortgage.
- Legal and Regulatory Considerations: Developers must comply with all legal and regulatory requirements related to property development, zoning, permits, and construction standards.
- Market Conditions: The state of the property market, both regionally and nationally, can affect the availability and terms of development exit finance.
- Professional Advice: It’s crucial for property developers to seek professional advice, including legal and financial counsel when considering development exit finance. This helps ensure they understand the terms, risks, and obligations associated with the funding.
Where can I get a development exit loan?
Exit finance is fairly similar to a bridging loan because it is short-term and can be arranged very quickly. You are most likely to be able to get exit finance from specialist lenders such as Hunter Finance who are experienced with completing loans quickly.
You can also find a range of lenders via brokers, although this will usually come with a broker service fee. You can also approach lenders directly and get an answer within a matter of days.
How long does it take to arrange an exit loan?
As with bridging loans and development finance, loans can be arranged and issued within a matter of days. However, we recommend allowing a month if you can, to ensure all the valuations, site visits, paperwork and fund transfers can take place in time.
Hunter Finance is an independent lender of exit finance, pre-completion loans and bridging loans. We loan to both first time and experienced developers across the South of England.
