FOUR FAST FACTS ON: DEVELOPMENT FINANCING DECEMBER 2022
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What is development finance? Development finance is funding provided to finance the construction costs of a development project.
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The development project could be residential or commercial (or a mix of the two), and can range from a basic residential home to an apartment building, a hospital, a hotel, an office building, or a retirement village.
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Events of default Lenders take on a higher risk when financing development projects because there will be limited value until completion. As a result, the scope of events of default is usually much more comprehensive and bespoke than a typical corporate loan. Additional compliance and reporting undertakings are a feature, as is the requirement to enforce project documents, and to allow lenders access to the development and associated meetings. A key requirement is that the development will complete on time, which will typically be set with a generous buffer before the loan maturity date. Specific events of default include failure of the development to reach practical completion by the required date, and abandonment of construction works during the term of the facility.
Drawings Development finance facilities typically contain more detailed conditions precedent to each drawdown, requiring a project monitor to certify the costs being funded are directly related to the development, there are no unfunded cost overruns, and that the project is on track to complete by the required practical completion date. In addition, because the value of the underlying asset increases as the development progresses, development loans are advanced over time, with instalments drawn down as pre-agreed milestones are reached, or against invoices for costs incurred. There may also be a requirement for a specified amount of equity to be funded alongside drawings, or before any drawing under the development facility is made.
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Documentation Due diligence is a significant aspect of development finance. Lenders typically want a full view of the proposed development and each step to final completion, when the finished asset becomes more valuable security. The key contracts, such as the construction contracts and the arrangements with subcontractors, are carefully considered to ensure lenders’ interests are protected. A common feature of development finance are direct and tripartite agreements. These allow lenders to step in, enforce key contracts, and complete the development if the borrower defaults.
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