What makes ground-up schemes different
A new build carries more risk for a lender than a refurbishment or conversion, because the value of the finished scheme depends on the whole construction programme being delivered. Lenders therefore focus on the site, the build contract and the people delivering it.
Ground conditions are often the first question. A site investigation, and allowances for abnormal costs such as piling, retaining walls, drainage or contamination, give the lender confidence that the budget is realistic. Utility connections, highways works and any Section 106 or Community Infrastructure Levy payments also need to be in the appraisal.
Before the build facility is released, lenders normally want pre-commencement planning conditions discharged, a contractor appointed and the monitoring surveyor's initial report completed. Starting this work early helps avoid delays between buying the site and starting on site.
Contracts, contractors and procurement
How the build is procured affects the lender's view. A main contractor on a recognised form of contract, such as a JCT design and build or standard building contract, gives clear responsibility for cost and programme. Lenders will look at the contractor's track record, financial standing and insurance.
Some experienced developers manage construction themselves using trade packages. Lenders will consider this where you can show a history of delivering similar schemes, but they may apply a larger contingency or lower leverage.
- Contractor quote or tender, with the scope clearly defined
- Programme showing key stages and practical completion
- Contingency, commonly expected at around 5% to 10% of build cost
- Professional team, including architect, structural engineer and quantity surveyor
Leverage and phasing
Most senior development lenders go to 60% to 70% of GDV and usually fund up to about 90% of costs. On larger sites, schemes are often built in phases, with sales from early phases reducing the loan and sometimes funding later ones.
Phasing can reduce peak borrowing and interest, but lenders need to be comfortable with how each phase stands alone if the market changes. Where you want higher leverage, stretch senior or mezzanine finance can sit alongside the senior loan.
We model the facility against your appraisal, including rolled-up interest and fees, so you can see the true day-one advance, the build facility and the equity you need to contribute.
Warranties and the exit
Buyers of new-build homes will usually need a structural warranty to obtain a mortgage, so lenders expect one to be arranged from the start, typically from providers such as NHBC, LABC Warranty or Premier Guarantee.
The exit is usually unit sales, a refinance onto investment finance, or a mix. If sales may take time after completion, a development exit loan can repay the development lender and reduce the cost of carrying unsold units. Lenders will look at the depth of the local market for the type of unit you are building, and whether the number of units can realistically be sold within the term.
For homes of every kind, including conversions as well as new builds, see residential development finance. For offices, industrial and retail schemes, see commercial development finance.
Indicative quotes from our panel are a starting point, and final terms depend on each lender's valuation, monitoring surveyor and credit checks.
