Senior Debt Finance

Senior Debt Finance for Property Development

We help secure senior debt development finance for property developers.

Senior debt development finance is the highest prioritised form of debt-based finance for property development used by developers. It's suitable at any development project stage for funding one or multiple property developments at any scale in the UK.

Our Senior Debt Finance service for developers

  • Market-leading senior debt finance up to £250m
  • Experienced developers only
  • Complex borrowing structures lent to - offshore and non-UK residents
  • All UK and certain EU jurisdictions considered
  • Upscale and run multiple projects
  • All asset classes considered

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Senior Debt Development Finance

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Our 2024 guide to Senior Debt Finance for Property Development

"Senior Debt Development Finance" is the most frequently used type of short-term development finance by property developers to fund construction projects. It's the most popular form of development finance due to having the lowest interest rate for the borrower. Senior debt development finance has a lower interest rate because it offers the lowest-risk investment to the lender, providing a priority claim on the borrower's assets in the case of default or liquidation. It's called "senior" because of its seniority in debt obligation repayment, and real-estate collateral or assets of the borrowing entity typically secure it.

This guide aims to provide a comprehensive overview of senior debt finance for property development, including its characteristics, features, how it works, who uses it, when it can be used, and the benefits of its use.


What are the characteristics of Senior Debt Development Finance?

Senior Debt Development Finance is the primary form of borrowing secured against a development asset and offers the largest loan amount provided by a lender for a property development project.

As senior debt is the first debt option for a project and is repaid before any other form of finance, this type usually attracts the lowest interest rate and highest security for the lender. The loan terms will vary from development to development, with conditions negotiated between the borrower and the lender.

A break down of the characteristics of senior debt financing can be found below.

Priority: Senior debt holders have a higher priority claim on a company's assets and cash flows than other creditors in case of default or bankruptcy.

Security: Senior debt is usually secured by collateral or specific assets, providing a layer of protection for lenders.

Fixed Repayment: Senior debt is structured with fixed repayment terms, including interest payments and a defined repayment schedule.

Lower Interest Rates: Senior debt typically carries lower interest rates than other debt financing forms due to its higher priority and security.


What are the features of Senior Debt Development Finance?

Several key features are typical of senior debt development finance for property projects. It is typically secured by assets, like real estate, equipment, or inventory, which lenders can claim in case of default. Lenders often impose financial and operational covenants to maintain the borrower's financial stability. Some agreements include prepayment penalties for early repayment, while the terms, such as interest rates, repayment periods, and collateral requirements, are generally negotiable. The 4 key features can be found below.

 

  1. Security. Senior debt for property development schemes is typically secured by assets such as real estate, equipment, or inventory, which the lender can seize in case of default and sell to recoup the monies owed.
  2. Covenants. Lenders may impose certain financial and operational covenants to ensure the borrower's compliance with agreed-upon terms and maintain financial stability.
  3. Prepayment Penalties. Some senior debt agreements may include prepayment penalties if the borrower repays the loan before the agreed-upon maturity date.
  4. Negotiable Terms. The terms of senior debt financing, including interest rates, repayment periods, and collateral requirements, can be negotiated between the borrower and lender.

How does Senior Debt in Development Finance work?

Senior debt financing is a structured process that provides capital to borrowers, typically businesses, for various purposes. It starts with the borrower submitting a loan proposal, followed by the lender's due diligence to assess creditworthiness and collateral. Both parties negotiate the loan terms if approved, and the lender disburses the funds. The borrower then follows the repayment schedule, with the lender having the right to seize collateral in case of default. Here are the 4 key steps in the development finance process.

  1. Application and Due Diligence: The borrower applies for senior debt financing by submitting a loan proposal to potential lenders. Lenders conduct due diligence to assess the borrower's creditworthiness, financial performance, and collateral.
  2. Loan Agreement: If approved, the borrower and lender negotiate the terms of the loan agreement, including interest rates, repayment schedule, collateral, and covenants.
  3. Disbursement: Once the loan agreement is finalised, the lender disburses the funds to the borrower, who can utilise the capital for various purposes, such as expansion, acquisitions, or working capital.
  4. Repayment: The borrower makes periodic interest payments and follows the agreed-upon repayment schedule. In default, the lender has the right to seize the collateral and liquidate it to recover the outstanding debt.

Who uses Senior Debt for Development Finance?

Senior debt finance is commonly used by real estate developers and established companies whose core business is property development.

Real Estate Developers: Property developers use senior debt finance to fund construction projects, where the underlying property is collateral for the loan.

Established Companies: Companies with a solid operating history and stable cash flows often utilise senior debt financing to fund expansion plans, working capital needs, or refinancing existing debt.

Leveraged Buyouts (LBOs): Private equity firms often use senior debt financing as part of leveraged buyout transactions to acquire a company, using the assets and cash flows of the target company as collateral.

Infrastructure Projects: Governments and private entities involved in large-scale infrastructure projects often rely on senior debt finance to secure funding for the construction and development phases.


When would a developer use Senior Debt Development Finance?

Senior debt finance can be used in various scenarios, including:

Acquisition Financing: Senior debt finance is commonly utilised in acquisitions to finance land purchases or an existing development site. It can also fund company purchases, mergers and management buyouts outside property development.

Project Financing: Large-scale development projects, such as construction and infrastructure projects, often require significant upfront capital, which can be secured through senior debt financing.

Expansion and Growth: Companies looking to expand their operations, enter new markets, or launch new products can use senior debt finance to fund their growth plans.

Refinancing: Borrowers may opt for senior debt financing to refinance existing debt at more favourable interest rates or to consolidate multiple debts into a single loan.


What are the benefits of Senior Debt Finance for Development?

Lower Cost: Senior debt generally offers lower interest rates than other debt financing forms, reducing borrowing costs.

Flexibility: Borrowers and lenders can negotiate loan terms, such as interest rates, repayment periods, and collateral requirements, to align with the borrower's needs.

Priority in Repayment: Senior debt holders have priority over other creditors in the event of default or liquidation, increasing the likelihood of repayment.

Security: Collateral provided by the borrower provides an added layer of security for lenders, reducing their risk and enabling access to larger loan amounts.

Established Market: Senior debt finance is a well-established and widely used financing option, providing access to a broad network of lenders with expertise in evaluating and structuring loans.


Example of a property development scenario for Senior Debt financing

RG Construction is a mid-sized property development development company looking to purchase an old office building and convert it into luxury apartments. The building is located in a high-end area of the city and is in need of extensive renovation. It was previously purchased by the city for £9.6 million and is being sold for £12.5 million.

In order to finance the purchase and conversion of the building, RG Construction has decided to use senior debt financing. After researching various options with their finance broker, they secure an offer of £9 million in senior debt financing from a private equity firm.

The loan is structured as a 8-year term, with a fixed interest rate of 3.25%, amortised over the life of the loan. The loan also includes a 6-month interest only period, with a balloon payment due at the end of the term.

To secure the loan, RG Construction agrees to put up the apartment building as collateral, as well as to pledge additional assets such as their accounts receivable and equity in other projects. As part of the loan terms, the lender also requires the development company to maintain certain financial ratios, such as debt-to-equity and liquidity.

RG Construction uses the funds to purchase the building and begins the conversion work. As the development progresses, the lender continues to monitor the company’s financials and requires monthly updates and reports. 

After 8 years, the apartments are completed and the loan is repaid in full. With the help of the senior debt financing, RG Construction is able to successfully convert the old office building into luxury apartments, providing them with an excellent return on investment.


Conclusion

Senior debt finance offers an attractive financing option for companies seeking capital for various purposes and is often used in property development projects. With its priority claim, security, lower interest rates, and flexibility in terms, senior debt finance can support growth, acquisitions, refinancing, and project financing.

By understanding the characteristics, features, and benefits of senior debt finance, borrowers can make informed decisions about their financing needs and explore opportunities to secure funding for their business objectives.


Remember, before making any financial decisions, it is advisable to consult with qualified professionals such as accountants, lawyers, and financial advisors who can provide tailored guidance based on your specific circumstances.

Disclaimer: This guide is intended for informational purposes only and should not be considered as financial or legal advice. Borrowers should consult with qualified professionals and conduct thorough due diligence before pursuing Stretched Senior Debt Finance or any other financing options.


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