How a development facility works
A development facility usually has two parts. The first is a day-one advance towards the site, either at purchase or when an existing site is refinanced. The second is a build facility, released in stages as work is completed and checked.
Before each drawdown, the lender's monitoring surveyor visits the site, confirms the work done and the costs incurred, and signs off the next release. Funds are normally paid in arrears, so you or your contractor need to carry the cost of each stage until it is drawn.
Interest is charged only on the money drawn, and is usually rolled up and repaid with the loan when units are sold or the scheme is refinanced. Arrangement and exit fees are common, and the lender will need its own valuation and monitoring reports, which are paid for by the borrower.
LTGDV, loan to cost and your equity
Development lenders measure risk against two figures. Loan to gross development value compares the total facility, including rolled-up interest and fees, with the expected value of the finished scheme. Most senior development lenders go to 60% to 70% of GDV.
Loan to cost compares the facility with the total cost of land and construction. Development lenders usually fund up to about 90% of costs, so most schemes need some of your own money in, typically towards the land.
Where the senior loan leaves a gap, stretch senior facilities or mezzanine finance can sit alongside it, at a higher cost. Equity partners are another option. We model the structure against your appraisal so you can see how leverage, cost and your own contribution trade off before any lender is approached.
Your team, programme and budget
Lenders back people as much as sites. They will want to understand your previous projects, who is building the scheme and who is overseeing it. A first-time developer can still be funded, particularly where an experienced contractor, project manager or development partner is involved.
A well-presented case usually includes:
- A full development appraisal with land cost, build cost, professional fees, finance costs and contingency
- Planning permission and any conditions, with a note of what remains to be discharged
- A build programme and a contractor's quote or tender, ideally on a recognised form of contract
- Details of the architect, quantity surveyor and other professionals
- Evidence for the GDV, such as comparable sales and agent opinions
Contingency is important. Lenders typically expect a sensible allowance for overruns, and a scheme with no headroom is harder to place.
Planning the exit from day one
The facility is repaid from the sale of completed units, a refinance onto longer-term investment finance, or a combination of the two. Lenders want to see that the term allows time to finish the build, obtain sign-off and warranties, and sell or refinance.
If sales take longer than planned, a development exit loan can repay the development lender once the build is complete, usually at a lower rate, giving you more time to sell. Considering this at the outset helps you choose a term and structure that leave room for the market.
We look at the whole route from site purchase to repayment, then approach suitable lenders with a clear case. Indicative quotes from our panel are a starting point, and final terms always depend on the lender's valuation, monitoring surveyor and credit checks.
