Development finance brokers: what they do and how they are paid

A development finance broker turns your project into a case lenders can assess, decides which lenders to send it to, and negotiates the terms. The broker does not lend. Development finance, which our guide to property development finance explains in full, is a short-term loan released in stages as the build progresses and sized against cost and finished value. Lenders differ widely on scheme size, location, experience and leverage, which is where a broker earns its place.

On a typical development deal, a broker will:

1. Review your appraisal: land cost, build cost, fees, contingency, finance costs and gross development value.
2. Check the planning position, the building contract and the professional team.
3. Shortlist lenders whose published criteria fit the scheme and your experience.
4. Present the case, collect indicative terms and compare them on total cost.
5. Negotiate the heads of terms and keep the valuation, monitoring surveyor and solicitors moving to completion.

A broker can only place your deal with lenders it works with, so the panel decides your options. Development lenders publish very different limits. In our comparison of development finance lenders, minimum loans start anywhere from £10,000 to £1 million, published loan to cost runs up to 90% and loan to gross development value from 65% to 75%. Some lenders accept first-time developers and some do not.

Several development lenders also work only through intermediaries. Colenko, for example, says its website is strictly for professional intermediaries, and Roma Finance says its site is for introducer use only. For those lenders, a broker is the route in. Our lender directory shows which lenders say this on their own pages.

The appraisal is the document lenders read first, and a broker’s main practical value is making it credible before it reaches them. Lenders size the loan against both total cost and finished value and lend the lower result, so weak numbers on either side cut the facility.

• Costs. Whether build costs match the specification and the contract, and whether there is a contingency.
• Value. Whether the gross development value is supported by local sales evidence the valuer is likely to accept.
• Finance costs. Whether interest, fees and monitoring costs are in the cost base.
• Exit. Whether the sale or refinance timetable fits the loan term with room for delay.
• Equity. Whether you can fund the gap between the loan and total cost, or need a second layer such as mezzanine finance.

A broker should tell you when the numbers do not work. One that sends a weak appraisal to many lenders risks declines and wasted valuation fees.

The faster you supply a complete pack, the faster a broker can get terms. Most development lenders ask for a similar set of documents, though each sets its own list:

• The development appraisal, with a cost plan and the sources of your equity.
• Planning permission and the approved drawings, or the current planning position.
• The building contract or contractor quotes, and the build programme.
• A schedule of the projects you have completed, with photos and figures where you have them.
• Details of the borrowing company, its directors and shareholders.
• Evidence of local sale prices or rents to support the finished value.
• Your exit plan: sale, refinance or both.

If the borrower will be a new company set up for the scheme, tell the broker early, because lenders usually ask for guarantees from the people behind it.

Development finance brokers are paid in one or more of three ways, and each should be set out in writing before you commit:

Commission is not a hidden extra in itself, but it can create a pull towards one lender. FCA rule CONC 4.5.3 requires a regulated credit broker to disclose prominently, in good time before a credit agreement, the existence and nature of any commission or fee from a lender or third party that could affect its impartiality, or that would have a material impact on the customer’s decision.

It depends on who is borrowing and what the loan secures. Credit broking under the Regulated Activities Order covers introducing an individual or a “relevant recipient of credit” to a lender, including for business loans that are otherwise exempt. The Order defines a relevant recipient of credit as a partnership of two or three persons not all of whom are companies, or an unincorporated body not made up entirely of companies.

Most development finance goes to a limited company or a special purpose vehicle set up for the project, so the introduction may fall outside credit broking and the broker need not be authorised for that deal. Where you, as an individual, will live in the finished property, the loan can become a regulated mortgage contract, which needs a lender and an adviser with the right permissions.

Either way, check the firm. Look up the company at Companies House, and if it says it is authorised, check the Financial Services Register entry matches the name and contact details you were given.

Ask these before you sign a terms of business letter:

1. How are you paid on this deal: a fee from me, commission from the lender, or both? How much?
2. Is any fee payable before the loan completes, and is it refundable?
3. How many development lenders do you work with, and which would you approach for this scheme?
4. Have you placed schemes of this size, type and location recently?
5. What do you need from me, and who prepares the appraisal?
6. Will you approach lenders one at a time or several at once, and with my consent each time?
7. What will valuation, monitoring and legal fees cost, and who pays them?
8. Are you authorised by the FCA, and is that relevant to this loan?

Go direct when you already know a lender that funds your type of scheme and you are comfortable presenting it. Use a broker when the scheme is unusual, you are new to development, you need to compare several lenders, or the lender you want deals only with intermediaries. Our guide to choosing a business finance adviser covers the same trade-offs for other kinds of lending.

Capzy is a credit broker, not a lender. The lender pays us when a facility completes and we do not charge you a fee. We describe lenders from their own published terms and do not rank them. You can check your funding options with a soft search that does not affect your credit score. A lender’s full application may use a hard search, and all funding is subject to status and lender criteria. More guides are in our lenders category.