The different types of PDL
This article is part of our series on Crowdstacker Property Development Loans (PDL). Here we take a look at the different types of Crowdstacker PDLs - Bridge, Develop and Exit.
Each type of Crowdstacker Property Development Loan provides the chance to invest via a PDL at different stages of a property development.
How does financing work in the world of property development?
Good quality property developers often form strong relationships with their financing partners. This is because once a trusting relationship has been built it can provide dividends to all parties involved. During the course of a development the financing needs change, so having a good relationship with those in charge of funding sources is important.
Helping to get property developments off to a great start
PDL Bridge offers the investor the chance to be involved, in a hands-off way, in specific property developments, at (typically) the early stage of a development. For the property developer themselves, the funds offer flexibility during the planning phase of a project.
At the start of a project the main security for any lending required will be the proposed development site. The intrinsic value of this site will depend on the lands current usage, which may include a useable building or buildings already in place, and/or have planning in place for a development. At this stage a developer is likely to be seeking what is known as bridging finance, so called because it is used to bridge the gap between the initial stages of planning a project when the land asset’s value can be low, to the start of actually commencing it when the land asset’s value may have changed.
PDL Bridge products can have term lengths between 6 months and 30 months, or even slightly longer. The amount lent can range between £200,000 to £750,000. The maximum loan-to-value can be in the region of 85% but this is because it is secured against a site based on its actual, pre-development value, and so it is deemed slightly lower risk than a site where construction work has begun. In line with this the returns for PDL Bridge investors, are usually for a shorter term.
What about during the construction process?
PDL Develop offers the investor the chance to be involved via a PDL investment at the development stage of a property development. For the property developer, this is the stage where a development gets going and the builders move in to do their work.
Where bridge finance provides support whilst everything needed for a project is put in place, development finance is about making sure funds are exactly where they need to be as building progress is made. At this point developers need a financing partner which is able to lend not only against the current value of the site but against the predicted value once the project has been completed.
During the construction process PDL Develop products provide the finance needed to the property developer. PDL Develop products are offered to developers who are about to start, or have only just started, construction. The maximum loan to value is calculated based on the final value of the project (Loan to Gross Development Value) and this is why the LTGDV is lower than a PDL Bridge, typically in the region of 75%.
Typical amounts lent are again in the £200,000 to £750,000 range, and as with all PDLs they are used as mezzanine finance to top-up lending from a senior lender. These PDL Develop products are typically for a longer term.
What happens towards the end of a project?
PDL Exit offers the investor the chance to be involved via a PDL investment at the end stages of a property development. Anyone who has ever undertaken any kind of building project will know that the last few weeks or months of a project can be the trickiest part. This is the time when any delays that have occurred earlier in the build can have an impact on the project and any slippage in the predicted end date can become harder to control. It can also be a time when getting people on site to finish jobs can become harder and choreographing different trades who are all trying to work around each other can be more challenging.
Earlier financing arrangements may start to look less appealing at this stage. Higher rates of interest on borrowing that is still being repaid make less sense when a project is almost complete and the value of the underlying asset is therefore much stronger. This is why many developers, whose projects are coming to an end, often look around for more favourable refinancing.
PDL Exits take developers over the line
This is where the PDL Exit comes in. This type of lending is designed to help developers through the last weeks or months of a project, and the terms reflect the comparatively lower risk.
From an investor’s perspective this means that the interest rate, whilst still attractive is lower than a PDL Develop investment. The term is also shorter to reflect the fact that the project is almost complete. Whilst still typically in the region of 75% Loan to Gross Development Value a loan can be up to £750k because the intrinsic value of the development site against which it is secured is obviously much higher – the nearly complete properties are worth more than the starting site.
PDL investors can accompany property developers along the way for an entire project
PDLs were originally conceived by Crowdstacker because of the interest shown by our investors in investing in property. As our relationships with the senior lenders, brokers and developers which we work with has progressed, we decided to create different products to accommodate the variety of financing needs throughout the entire life span of a property development project.
In this way investors can choose which parts of property development they wish to invest in or to achieve a better balance of risk in their property investment portfolio to suit their own specific needs.
You can find out more about our current PDLs and the rest of the series on PDLs below:
What is a Property Development Loan?
What type of finance is a PDL?
The key differences between a PDL Loan and a traditional P2P business loan
Why do PDLs offer higher interest rates?
Why don't senior lenders offer mezzanine finance?
Why do property developers need mezzanine finance?
What determines when a PDL starts earning interest?