Interest Rates and Fees for Standard Development
Finance
A typical comparison would be as follows:
- High Street Banks,
3-4% over base with arrangement fees of 1% and exit fees of 0-1%
- Specialist Banks, 6-8% over base with arrangement
fees of 1-2% and exit fees of 0-1.5%
We feel it's important to say here that if the rate offered by a
funder is low it is because the risk is low relatively speaking. Clearly then if the interest rate (or profit share) is high
it's because the risk is that much higher.We do find ourselves talking to some Builders/Developers
who are so ‘hung up' on the interest rate and fees they lose sight of what it is they are asking the funder to provide.
For example if the land cost on a project is say £500k and the build cost is say £700k then with
a High St. bank you would generally need to find £420k to make the project work (i.e. 35% of all costs) whereas with
a specialist lender you may only need to find £200k!(i.e.40% of land only).
It should come as no surprise
then that the interest rate charged by a High St. in this scenario will be lower than that charged by a specialist lender
quite simply because the High St. is asking you to part with an additional £220k and is thereby reducing its' risk
and increasing yours.
Interest Rates for 100% / Mezzanine
Finance
By
definition the risk taken by these funders is much greater than those mentioned above and if you are asking someone to put
up all the monies and you are putting in little or nothing then the rates and fees / profit share taken by the funder is going
to reflect the extra risk they are taking with their money.
The costs for this type of funding vary depending on the factors surrounding the deal such as location, level
of pre-sales and to whom etc.
As
a guide, Mezzanine (top-up) finance is generally charged at 2% of the advance so if the total project costs
are say £2m with say £1.6m coming from senior/primary bank funding then the Mezzanine funder is providing £400k
and they will charge 2% of this amount monthly and often add it (roll it up) to the original loan (you will therefore be charged
interest on the interest if the interest is allowed to roll up).
Where 100% finance is provided by one funder then the cost usually equates to a profit share
of 10-50% of the profit depending on the factors surrounding the deal such as location, level and strength of pre-sales etc.