Property Development Loan Agreement – 100% Financing

Before reading this article, please make sure you have a development loan agreement to hand or use the one we supply - http://www.property-system.com/index.php?pageid=investing

This agreement is to be used in circumstances whereby an investor or group of investors (commonly known as a syndicate) wish to advance money to a property developer in order for the developer to use the funds to build a new property or to substantially improve an existing property.

If you are looking to raise 100% financing from investors for your property deals or if you want to invest in a property deal yourself, than this is the agreement you will need.

Typically a developer (i.e. you) will obtain partial funding from a bank (commonly known as the primary lender) and the rest of the monies from other investors. These investors will be loaning the monies expecting a good monthly return (typically between 1.5% to 4% per month) or a share of profits on completion of the property.

This agreement will be similar to the loan agreement the developer (i.e. you) will have signed with your bank so you should have few problems entering into this.

It is common practice for the investors to secure their investment by taking a second charge over the property. This charge will rank immediately behind the primary lenders (i.e. the bank’s) first charge. This means that in the event that the property needs to be sold, the bank will be entitled to take its money first from the proceeds of sale. The investors will then take their money from the balance. Investors will therefore need to assess whether there is enough equity in the property once the bank has been paid to secure their investment.

Finally, if there is a bank involved which has a first charge, then it is vital you obtain the bank’s consent to the investor loan. The investors will not be able to register their second charge against the property at the land registry without it. Also there would be a very good chance that the developer would be in breach of his loan agreement with the bank if he borrowed money against the development without first informing the bank and obtaining its consent.

This agreement is drafted assuming that the Developer is a limited company. Where you see the wording ‘Developer’ in this agreement it in fact means the individual shareholder behind the company and his name should be inserted. It also assumes that a syndicate of lenders will be investing and party to this agreement.

I would like to draw your attention to the following clauses:

Clause 1

1.2 This agreement has been drafted to allow a syndicate of investors to make loans to the Developer. Each syndicate member will be responsible to the Developer for his own obligations. If there is only one investor and not a syndicate, then this clause 1.2 should be deleted.

Clause 2

2.1 You will need to insert the maximum amount of each segment of money to be provided to the Developer in any one go (e.g. £10,000). This is to prevent the Developer spending the money all at once on potentially unauthorized expenditure. You will also need to ensure you incorporate the correct details of the property being developed.

Clause 7

7.1 This is the most important clause of the agreement!! You will need to insert the monthly interest rate being charged.

Clause 9

9.1 If an arrangement fee is being charged by the Syndicate then enter the amount here.

9.2 It is customary for the Developer to meet the investor’s legal costs (which will be deducted by the developer as a cost of the project). Insert the maximum amount which will be paid.

Clause 11

11.1 This clause is important. It simply sets out all the representations and statements of facts (warranties), which the developer has made to the investor to induce him to invest with the Developer. This clause will focus the Developer’s mind and hopefully flush out any fact he thought he might not want to tell the investors about. Investors should resist any significant changing to this wording and should ask thorough questions of the developer regarding any request to do so.

Clause 12

12.2 The Developer will want to sell the property at a pre-determined price to make his profit. If he sells the property for less than his predetermined price, then he will make less profit. The investors though want to see their money returned and may be less concerned at waiting for the property to be sold for its highest value. This clause allows the investors to determine the price the property should be sold at if it is not selling at the Developer’s ideal price. The investors will only use this price setting right once a reasonable period of time has passed for the Developer to attempt to sell the property at his preferred price. The second lower price is commonly the breakeven price.

Clause 13

13.1(l) This clause allows the Investors to terminate the agreement should there be a change of shareholder in the development company. The reason we have this clause is to prevent the Developer leaving the project. The investors may only be investing because of the identity and reputation of the Developer. If the Developer was able to just leave the project at any time then the investors might not want to invest. You will need to insert the names of the shareholders of the Company.

Schedule

This schedule outlines the conditions precedent. Simply put, this means the Developer will have to provide the investors with certain information and do certain things before the investors are under any legal obligation to advance any money under this agreement (e.g. the primary lender grants and gets consent to the creation of the investors second charge and the provision of financial figures by the Developer of the project). Your solicitor will advise you as to the need for you to insert other conditions precedents in this schedule.

This agreement must be reviewed by a solicitor before its use to ensure it meets with your specific requirements. The creation of the charge will need to be handled by a solicitor to ensure everything is correctly done.

Our recommended property development loan agreement can be ordered from -> http://www.property-system.com/index.php?pageid=investing