This has been a case where the finish line is usually marked by the completion of a residential or commercial development project. The dust has been removed, the snagging list is finished, and the certificates have been issued. Nonetheless, to the seasoned property developers, when the physical construction is finished, a very serious, high-stakes financial stage commences: the exit.
The timing risk on the transition between a high-interest construction facility and a more stable financial position is a risky undertaking. Otherwise, the losses incurred in such a time can be significant. This is where specialized financial products, namely, development exit bridging, are involved.
Understanding Development Exit Finance
Development exit finance is an exclusive short-term funding that is meant to substitute a development loan when an undertaking has reached the position of practical completion. Whereas development finance is designed to finance the building process, that is, releasing funds in phases as the construction develops, the exit finance is designed to finance the post-construction phase. The first is to settle the balance of the development loan, thus preventing the accumulation of high construction interest rates.
This kind of financial instrument is a form of a refinance plan. It is aware of the fact that the risk profile of a property varies significantly when construction is completed. A shell half-built is a risky investment; a fully finished, market-ready house is a safe, physical investment. The risk is reduced, and therefore, lenders will provide exit finance at very low rates compared to the original development facility. This will enable the developer to minimize the monthly expenditures and maximize cash flow as he closes the sale of the units or refinances them on a long-term investment mortgage.
When is Exit Finance Required?
A developer may be required to employ an exit strategy of bridging finance in three major situations.
1. The Loan Maturity Deadline
The development loans are highly time-limited, generally between 12 and 24 months. Delays are almost unavoidable in the construction industry. Projects may exceed their expected completion dates due to disruptions in the supply chain or a change in the planning permission, or bad weather. Upon expiry of the loan term, the lender has an entitlement to recall the debt. The developer may default because of defaulting repayment, and this may make him/her suffer punitive measures or even lose the property. The new facility is furnished by Exit Finance, which helps a developer to pay off the original lender to allow him the space to sell off or refinance without the risk of foreclosure.
2. Stalled Sales and Market Absorption
High-value asset sales, even in a strong market, are a time-consuming process. In the case where a developer finishes a block of apartments and only sells 30 percent of the apartments in the loan term, then the developer would have a huge shortfall. They will not be able to pay the whole development loan through partial revenue. In case they are compelled to take the initial low-ball offer just to clear the debt, they ruin their profit margin. The exit finance will enable them to clear the high-cost development debt and reduce their monthly interest payments, and sell the remaining units at their own speed to attain the best price possible.
3. Transitioning to a Buy-to-Let Portfolio
Other times, a developer may have an intention to sell a project, but when it is complete, he or she discovers that the rental yield on the property is outstanding. They opt to hold the units as an investment. Long-term holding is, however, not applicable to development finance as it is expensive. Exit Finance is an intermediary for a long-term Buy-to-Let (BTL) mortgage. It wipes off the construction debt, and the developer is able to change gears and secure a lower-rate 25-year BTL mortgage now that there is no time running out.
Comparing the Costs: Development vs. Exit Finance
The rationale of exit finance lies in the fact that the interest rate is reduced. The risk premium charged by the lenders falls to a considerable level since the build is complete. This is a saving amounting to tens of thousands of pounds per month for a developer.
Improving Developer Cash Flow
The property business is all about cash flow. When a development loan expires, the capital repayment is normally made in cash. Provided that the developer capital is locked in the unsold bricks and mortar, then there is a lack of liquidity. This is a liquidity crunch which tends to cause a fire sale, that is, taking up much lower bids simply to get some cash to pay the lender.
Through development exit bridging the developers can eliminate this strain. The move to a low rate of interest instantly raises the cash flow on a monthly basis. In case the properties are tenanted, the rent payment can even pay the new and reduced interest rates in full. This financial stability has the strength of allowing the developer to bargain with strength. They are able to wait and accept the right market value instead of giving in to the first customer who presents a fast takeoff. This waiting ability to get the right buyer usually distinguishes the successful project from a break-even venture in a volatile market.
Refinancing Options and Selling Strategies
The approach used following the acquisition of exit finance more or less relies on the long-term objectives of the developer and the property market condition.
The Phased Sale Strategy
To the individuals who are determined to sell it, Exit Finance offers the runway that is required to sell the property. The developer can individually or in stages sell the entire block as opposed to selling the whole block in a single sale to a single institutional buyer (which is usually at a discount). This is a piecemeal method that tends to give a higher aggregate price. The exit finance is used to meet the debt service expenses in the marketing period, so that the developer will not be in a hurry to complete the marketing.
The Refinance Strategy
The exit finance is a temporary one to those who wish to develop a portfolio. When the development loan has been cleared, and the property is stabilised (with tenants in it or with full warranties in place), the developer can attempt to access high-street banks or specialist buy-to-let lenders. These lenders are very cheap (in most cases, 3-6% per annum) with a slow processing speed. The exit finance helps bridge the timing difference so that the developer does not suffer the high rates of the construction loan whilst arranging the cheaper long-term mortgage.
