The three limits
A development facility is limited by whichever of these is reached first:
- Loan to cost (LTC): commonly up to about 85% to 90% of total costs
- Loan to gross development value (LTGDV): commonly up to about 60% to 70% of the finished value
- Day-one land advance: a cap on how much of the site price is funded at purchase
Your equity is the gap between total costs and the facility. Our LTV and LTGDV guide explains each measure.
A worked example
An illustrative scheme: land £500,000, build and fees £1,000,000, finance costs £150,000, total cost £1,650,000, GDV £2,300,000.
- 90% LTC would allow up to £1,485,000
- 65% LTGDV would allow up to £1,495,000
- If the day-one land advance is capped at 60% of the price, £300,000 of land is funded
Here the land cap is the binding limit. The lender funds £300,000 of the land plus the build and finance costs, a facility of about £1,450,000, which sits inside both the LTC and LTGDV limits. Your equity is the £200,000 balance of the land, plus purchase costs and stamp duty, all needed on day one. These figures are illustrative only.
Why the land is where your money goes
Lenders fund build costs in stages as value is added, so they are comfortable funding most or all of the build. The land is the riskiest part, as the lender would hold a site rather than a finished building if the project failed. That is why your contribution usually goes into the land, and why the day-one advance often decides whether a deal works.
Ways to reduce your cash input
- Planning gain: if you bought the site before planning, lenders may recognise its higher current value. See planning gain and land value.
- Stretch senior finance at higher leverage, at a higher cost
- Mezzanine finance behind the senior lender
- Equity partners or joint ventures, sharing the profit
- Deferred land payments agreed with the seller, where lenders accept them
Planning your equity
Budget for the day-one cash, purchase costs and stamp duty, any cost overruns not covered by contingency, and interest or fees not rolled into the facility. Developers on a first scheme should expect lower leverage and so more equity.
To see indicative leverage from lenders on our panel, use Instant Quotes and choose development.
Common budgeting mistakes
- Budgeting for the overall loan to cost but forgetting that the land advance is capped, so far more cash is needed on day one
- Leaving out stamp duty, legal and valuation costs on the site purchase
- Assuming the full GDV figure will be accepted by the lender's valuer
- Underestimating professional fees, planning obligations and utilities
- Leaving no reserve for cost overruns that fall outside the contingency
- Forgetting that drawdowns are paid in arrears, so working capital is needed during the build
Each of these can leave a developer short at a critical moment. Running your appraisal against each lender's limits, and stress-testing it with a lower GDV and higher costs, shows the true equity requirement. See how drawdowns work.
Common questions
Can I get 100% development finance?
Senior lenders rarely fund 100% of costs. Combining senior debt with mezzanine or equity partners, or recognising planning gain on land you own, can reduce your cash input substantially.
What is a typical developer contribution?
Commonly at least 10% of total costs, usually concentrated in the land, and more for first-time developers or higher-risk schemes.
Does development finance fund the land?
Usually part of it, through a day-one advance capped as a percentage of the price or value. The build is normally funded in stages.
What is a deferred land payment?
An agreement where the seller receives part of the land price later, often from sales. Lenders need to approve it, and the seller usually ranks behind the lender.
How much money do I need to start property development?
Commonly at least 10% of total costs, usually concentrated in the land, plus purchase costs, early professional fees and working capital. Partners, mezzanine or equity can reduce the cash you need.
This guide is for general information only and should not be treated as legal, tax or financial advice. Lender requirements depend on the property and your circumstances.
