What development lenders look for

Planning and the site

Most development lenders require detailed planning permission before the build facility is released. They will review the decision notice, the approved drawings and the conditions, and they will want to know which pre-commencement conditions are still to be discharged.

The site itself is reviewed for title, access, services and ground conditions. Lenders and their solicitors look for anything that could stop or delay the build, such as restrictive covenants, rights of way, ransom strips or overage. A site investigation and an allowance for abnormal costs, such as piling or contamination, reduce uncertainty.

Section 106 obligations and Community Infrastructure Levy liabilities also need to be in the budget. These can be significant on larger schemes, and lenders will check that they have been accounted for.

The development appraisal

The appraisal is the centre of a development case. It sets out what the scheme costs, what it will be worth and what profit it will make. Lenders will compare it with their valuer's view and the monitoring surveyor's review of the build costs.

• Land cost, including stamp duty and acquisition costs
• Build cost, ideally supported by a contractor quote or quantity surveyor's estimate
• Professional fees, warranties, utilities, planning obligations and sales costs
• Finance costs, including interest, arrangement and exit fees
• Contingency, commonly around 5% to 10% of build cost
• Gross development value, supported by comparable evidence

Lenders pay attention to the profit margin, often expressed as profit on cost or profit on GDV. A healthy margin gives room to absorb cost overruns or a softer sales market. A thin margin leaves the lender exposed if either moves, and may limit leverage.

Your experience and team

Development lenders want to understand who is delivering the scheme. They will ask about your previous projects, their size and type, and how they performed against budget and programme. A track record of similar schemes is the strongest support for a case.

The professional team matters too. Lenders look for a competent architect, structural engineer, quantity surveyor and, on larger schemes, a project manager. The contractor's track record, financial standing and insurance are reviewed closely.

A first-time developer can still be funded. Many development lenders look for previous projects, but a first scheme can be strengthened with an experienced contractor, project manager or development partner. Starting with a smaller, simpler scheme also helps. Expect more conservative leverage and closer monitoring on a first project.

Build contract and programme

How the build is procured affects the lender's risk. A fixed-price contract with a main contractor, on a recognised form such as a JCT contract, transfers cost and programme risk to the contractor. Lenders are generally most comfortable with this arrangement.

Experienced developers sometimes manage the build themselves through trade packages. This can reduce cost, but leaves the developer responsible for coordination and overruns. Lenders will consider it with evidence of previous delivery, and often with a larger contingency.

The programme should show the key stages from start on site to practical completion, and the term of the facility should allow for the build, sign-off and the exit. The monitoring surveyor will check that the programme and budget are realistic before the first drawdown.

GDV evidence and the exit

Gross development value drives the size of the facility, so the evidence behind it is examined carefully. Lenders want comparable sales of similar new-build or converted units in the area, ideally recent and with similar specification. Agent opinions help, but valuers place more weight on completed sales.

The exit is usually unit sales, a refinance onto investment finance or a combination. For sales, lenders look at the depth of the local market, the number of units and whether sales are realistic within the term. For refinance, they look at rental values and whether the units will meet investment lenders' criteria.

New-build warranties from providers such as NHBC, LABC Warranty or Premier Guarantee are normally needed, as buyers' mortgage lenders will usually require one.

Presenting a strong case

Clear presentation makes a case easier to assess and compare. A development pack that lenders can review quickly usually includes:

• A short summary of the scheme, the site and the funding requested
• The full appraisal, with sources for costs and values
• Planning documents and a note on outstanding conditions
• Drawings, specification and the build programme
• Contractor and professional team details
• Your experience, with examples of previous schemes
• An assets and liabilities statement

We assemble the case with you, compare lenders against the appraisal and approach suitable lenders with a consistent presentation. Indicative quotes from our panel are a starting point. Final terms depend on each lender's valuation, monitoring surveyor and credit checks.

Monitoring and drawdowns

Once a facility is agreed, the lender appoints a monitoring surveyor. Before the first drawdown, the surveyor reviews the appraisal, the build contract, the programme and the professional appointments, and reports to the lender on whether the budget and timetable are realistic.

During the build, funds are released in stages. The surveyor visits the site, confirms the work completed and the costs incurred, and recommends the next release. Drawdowns are usually paid in arrears, so the developer or contractor carries each stage until it is reimbursed. Cash flow planning should allow for this.

Lenders also watch for changes. Variations to the design, cost overruns, a change of contractor or delays to the programme will normally need to be reported and agreed. Clear, early communication with the lender and the monitoring surveyor tends to keep a facility running smoothly, while surprises can lead to drawdowns being held back until the issue is resolved.

Common questions

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.