The Benefits of Stretched Debt Development Finance

Stretched debt development finance is an increasingly popular tool for property developers looking to maximise leverage in their projects. This form of financing, often referred to as high-leverage development loans, provides access to a higher loan-to-cost (LTC) ratio compared to traditional senior debt. Developers who use stretched debt can cover a larger portion of the development costs, enabling them to take on more ambitious projects or improve their cash flow management.

What is Stretched Debt Finance?

Stretched debt finance is a hybrid between senior debt and mezzanine finance. It allows developers to borrow more than a typical senior loan by stretching the amount of debt available, typically up to 85-90% of the total project costs. This can significantly reduce the equity needed from developers or investors, making it a compelling choice for those looking to maximise leverage without taking on additional layers of finance, such as mezzanine loans.

Key Benefits for Property Developers:

1. Maximised Leverage: One of the primary advantages of stretched debt is its ability to maximise the amount of borrowing. By securing up to 85-90% of project costs, developers can leverage more debt and retain more equity for other ventures, increasing their capacity to take on multiple projects simultaneously.

2. Cost Efficiency: Stretched debt is generally more cost-effective than mezzanine financing because it avoids layering multiple financing products. Instead of combining senior debt and mezzanine finance, stretched debt offers a single loan structure with higher leverage. This can reduce overall financing costs for the project.

3. Simplified Financing Structure: By using stretched debt, developers can simplify the structure of their financing. There is no need to secure separate mezzanine or equity funding sources, as stretched debt covers a greater portion of the project’s costs in one product.

4. Increased Profitability: With stretched debt covering a larger portion of the project’s costs, developers can improve their returns on investment (ROI). Retaining more equity while securing higher levels of debt can lead to higher profitability, especially when the project’s success is realised.

5. Flexibility in Project Funding: Stretched debt can offer more flexible terms compared to traditional senior loans. This can be particularly beneficial for developers working on large or complex projects that require adaptable financing options.

How Stretched Debt Differs from Other Financing Options

Compared to senior debt, stretched debt offers higher leverage, but with a slightly higher interest rate due to the increased risk to the lender. It is still typically more affordable than mezzanine finance, which can come with significantly higher interest rates. Developers looking to optimise their financial structure for large-scale developments often find stretched debt to be an attractive middle-ground solution.

When to Consider Stretched Debt Finance

Stretched debt finance is ideal for experienced developers who are working on larger projects with solid financial projections. It’s also suitable when developers want to reduce the amount of equity they invest, thus freeing up capital for other investments. This type of finance works particularly well in markets where high capital outlay is required, such as London or other major UK cities where property development costs can be substantial.

In conclusion, stretched debt development finance offers property developers a powerful tool for increasing leverage and maximising profitability. By covering more of the project’s costs than traditional senior loans, this form of financing allows developers to retain more equity, reduce their financial burden, and take on larger or multiple projects at once. It’s a highly flexible and cost-efficient option for those looking to grow their property portfolios without over-extending their resources.

This article is part of LivFinance’s ongoing efforts to provide expert insights into property development financing options. If you're considering stretched debt finance for your next project, feel free to reach out to us for tailored advice.