Development Finance Basics

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Development finance funds the construction of new buildings, or the substantial conversion or refurbishment of existing ones. Unlike a bridging loan, which is usually advanced in one amount at completion, development finance is released in stages as the work progresses.

How the funding is structured

A development loan usually has two parts. The first is an initial advance against the land or existing building at completion. The second is a build facility, which is drawn down in stages to pay for the construction works.

Build drawdowns are usually paid in arrears. Before each drawdown, a monitoring surveyor appointed by the lender inspects the site and confirms the value of the work completed. The lender then releases funds for that stage. You will therefore need enough cash flow to keep the work moving between drawdowns.

How lenders size the loan

Lenders use two main measures. The first is the loan to gross development value, or LTGDV, which compares the total loan with the value of the completed scheme. The second is the loan to cost, or LTC, which compares the loan with the total cost of the land and the build. Senior lenders commonly lend up to around 60% to 70% of GDV and up to around 80% to 90% of costs, although the limits vary by lender and scheme. You will need to fund the balance yourself, and most lenders require your contribution to be spent before their funds are drawn.

Where more leverage is needed, the senior loan can be combined with mezzanine finance or equity, or a single lender can provide a higher-leverage stretched senior loan. Interest is normally rolled up over the term of the loan and repaid at the end, together with the loan.

What lenders look for

Lenders will want to see that the scheme is deliverable, so please be ready with:

• full planning permission, with any conditions and Section 106 or CIL obligations;
• a detailed build cost appraisal, ideally prepared or reviewed by a quantity surveyor, with a contingency (commonly 5% to 10%);
• your contractor’s details, and preferably a fixed-price building contract;
• your professional team, such as architect, engineer and project manager;
• a structural warranty provider, such as NHBC or an equivalent, for residential units;
• a valuation showing the land value and the GDV; and
• evidence of your development experience.

Costs to budget for

As well as interest and the lender’s arrangement fee, budget for valuation fees, legal fees, the monitoring surveyor’s initial report and site visits, and any exit fee. Some lenders charge their exit fee as a percentage of GDV rather than of the loan, so it is worth checking how it is calculated.

The exit

Development loans are usually repaid from the sale of the completed units, or by refinancing onto a term mortgage once the scheme is let. If sales take longer than expected, a development exit loan can repay the development lender and give you more time to sell, often at a lower rate.

Development finance is arranged on a business-purpose basis. If you intend to build a home for you or your family to live in, please see our Occupancy guide.