How commercial schemes are funded
As with residential development, a commercial facility usually combines a day-one advance towards the land with a build facility released in stages, checked by the lender's monitoring surveyor. Interest is charged on the funds drawn and is usually rolled up.
The main difference is the exit. A residential scheme is repaid as homes are sold to many buyers; a commercial scheme usually depends on one or a few occupiers. The completed building is valued on the rent it will produce and the yield an investor would pay, so the occupier and the lease drive the gross development value. Our guide to gross development value explains how values are set.
Pre-let, pre-sold or speculative
Lenders fall into three broad groups:
- Pre-let or pre-sold only. Many banks and some specialist lenders want an agreement for lease or a sale contract in place before the build facility is released. See pre-let commercial development finance.
- Partly pre-let. Some lenders accept a scheme where part of the space is committed, with leverage based on the income secured.
- Speculative. A smaller group will fund schemes with no occupier committed, usually at lower leverage and for experienced developers with strong local evidence of demand.
Small industrial and trade counter schemes in established locations are often easier to fund speculatively than large single-occupier buildings, which depend heavily on one tenant.
Planning, use class and the site
Commercial planning permissions specify the use class, and the permitted use affects who can occupy the building and its value. The Planning Portal's use classes guide summarises the main classes. Lenders also look at access for vehicles, yard space, eaves heights on industrial buildings and parking, because these affect lettability.
Mixed schemes with homes above commercial space are common; see mixed-use development finance. If a scheme is mainly residential with a small commercial element, a standard development finance facility may fit better.
How we compare commercial development lenders
We compare lenders on whether they need a pre-let, how they value the completed building, the leverage they offer, and whether the facility can move onto term finance once the building is let. Rate and fees are only part of the picture: a lender that will not release the build facility until a lease is signed may not suit your programme.
We then approach suitable lenders with the appraisal, the occupier position and the exit set out clearly. Instant Quotes gives indicative figures as a starting point, and final terms depend on each lender's valuation, monitoring surveyor and credit checks. The residual land value calculator and development ROCE calculator can help you test the numbers first.
