Deposit Release Bonds
for the Real Estate Sector
Unlocking working capital for UK developers
Property developers in the UK with an off-plan sales strategy are being faced with an ever-hardening insurance market. One of their greatest challenges is securing deposit release cover along side their latent defect policy. London Belgravia Brokers is bridging this critical gap by launching a surety product that protects 100% of the purchaser’s deposit and allows the developer to use the sales proceeds towards the cost of construction.
Deposit Release Bonds (DRB) can provide a developer with a low-interest source of working capital. It is most suitable for developers who are paying a perceived higher rate of interest for their senior debt or wish to ‘top-up’ their funding without having to enter the mezzanine and junior debt markets.
Once a developer has acquired a deposit release bond they can then deliver the bond to the appropriate obligee (purchaser) to protect their interests in the project. A DRB enables the developer to use the funds in escrow for the project’s remaining construction costs, as opposed to obtaining additional capital from traditional funding lines – which will result in a substantial saving for the developer.
Key Facts
Funds guaranteed by the surety provider
Available if a contractor fails to meet their contractual obligations
Provides security for the private purchaser and their solicitor
Facility up to £150m GDV
Helps sell off-plan units faster
Cover available up to 30% of the GDV
Key Facts
- Funds guaranteed by the insurer
- They are available if a contractor fails to meet their contractual obligations
- Provides security for the private purchaser and their solicitor
- Facility up to £150m GDV
- Helps sell off-plan units faster
- Cover available up to 30% of the GDV
Deposit Release Bonds: Product Overview
What is it?
It is a guarantee from the surety company to protect purchasers deposits when they are released to the developer during the build period.
Why are they used?
It’s used to allow the developer to unlock deposit money for sales, marketing & construction of the development.
When are they used?
The bond enables a developer to use the funds in escrow for the project’s remaining construction costs, as opposed to obtaining additional capital from traditional funding lines.
Who purchases it?
The bond is purchased by the owner/developer but for the benefit of the purchasers.
How it Works
Recent Case Study
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We recently had a developer whose project had a GDV of £20m. The project was 50% complete, with 75% of the units pre-sold. The developer wanted to release the funds tied up in escrow to complete the build.
- LBB was able to offer the developer a £2m bond at a cost of £160,000 (rate of 8%).
- By comparison, the developer’s junior debt option to borrow an additional £2m over 24 months was going to cost 18% in interest, plus a 1.5% arrangement fee and a 1.5% exit fee - resulting in an estimated cost of £698,000. It’s worth noting that this is before valuation rewrites and monthly monitoring costs.
- By using a Deposit Release Bond, the developer saved £538,000.
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