Development Funding: Structure the Deal to Finish

A site can look profitable on paper and still be difficult to fund. Development funding is not simply a percentage of the purchase price or projected sale value. Lenders need to see that the land, planning position, build budget, programme and exit all support one another – with enough contingency for the project to absorb delays.

For a small developer or experienced investor moving into ground-up construction, conversion or permitted development, the right facility can protect working capital and release funds as the scheme progresses. The wrong structure can leave the build underfunded at precisely the point trades, materials and professional fees must be paid.

What development funding is designed to do

Development finance is short-term lending for projects that create, improve or convert property. It can fund land acquisition, a redevelopment or conversion, construction costs, and sometimes professional fees, interest and contingency. Typical schemes include a new-build block, a single dwelling on an infill plot, office-to-residential conversion, commercial-to-HMO conversion or a substantial refurbishment that goes beyond ordinary bridging criteria.

Unlike a conventional mortgage, funding is usually released in staged drawdowns. The lender advances an initial sum to acquire the site or refinance existing borrowing, then releases further money as agreed construction milestones are reached. A monitoring surveyor, often referred to as a QS, inspects the works and confirms progress before a drawdown is made.

This protects the lender, but it also protects the borrower from relying on an unrealistic cashflow forecast. The practical question is not just, “How much can I borrow?” It is, “Will the timing of each advance keep the site moving without creating a cash shortfall?”

How lenders assess development funding

Most lenders consider two lending measures: loan-to-cost and loan-to-GDV. Loan-to-cost compares borrowing with the total development cost, including acquisition and construction. Loan-to-GDV compares borrowing with the projected gross development value once the completed units are sold or refinanced.

GDV is not a figure chosen by the developer. It will be tested against the valuer’s view of comparable evidence, local demand, specification and market conditions. If a scheme depends on premium sale prices, a lender may reduce the GDV or apply lower gearing. That can mean a larger cash contribution is needed, even where the build budget itself appears sensible.

Day-one LTV is equally important. This is the percentage advanced against the property’s value at the outset, before works have added value. A lender may be comfortable with a strong GDV-based facility but offer less on day one if the site has limited current value, planning risk or difficult security characteristics. Developers often need enough day-one funding to complete the purchase, cover stamp duty land tax, fees and the earliest works without exhausting their own liquidity.

Underwriters will normally want to understand the following before they issue terms:

• the purchase price, current value and planning status;
• detailed build costs, professional fees and contingency;
• the developer’s relevant track record and contractor arrangements;
• projected GDV supported by local comparables; and
• a credible sale or refinance exit, including the likely timescale.

A first-time developer is not automatically excluded. However, less experience may mean lower leverage, more scrutiny of the contractor and a requirement for stronger professional support. A lender may also expect evidence that the borrower has cash available above the quoted contribution.

Staged drawdowns: where good schemes can still stall

A development facility is often described by its headline loan amount, but the drawdown schedule matters more than many borrowers expect. The schedule should reflect when the project actually spends money. Groundworks, structural work, first fix, second fix and completion do not carry identical costs, and material lead times can alter the pattern.

Each drawdown is generally subject to a monitoring report, updated valuation considerations and lender checks. If the work is behind programme, the build specification has changed or costs have risen, the lender may ask questions before releasing further funds. That is not necessarily a refusal, but it can delay payment if the explanation and evidence are not ready.

In our broker experience, cases most often stall because the budget was prepared as a broad estimate rather than a cashflow document. Underwriters query missing professional fees, an inadequate contingency, an optimistic programme, or a contractor quotation that does not match the scope shown on drawings. Another recurring issue is assuming the full facility is available immediately. It is not. Undrawn development funding is controlled capital, released against progress.

A sensible contingency is not a sign of poor planning. It recognises that labour availability, utilities, planning conditions, weather and specification changes can affect both cost and programme. The appropriate allowance depends on the type and complexity of the works, but it needs to be visible in the appraisal rather than treated as an afterthought.

Interest, fees and the real cost of the facility

Development finance is usually priced higher than a long-term mortgage because it is specialist, short-term lending secured against a project in progress. Costs can include an arrangement fee, valuation fees, legal fees, monitoring surveyor costs, drawdown fees and interest. A lower monthly rate does not automatically make one facility cheaper if the lender charges higher fees, limits drawdowns or applies costly extension terms.

Interest may be retained, rolled up or serviced. Retained interest is usually deducted or set aside from the facility at the outset to cover the agreed term. Rolled-up interest accrues and is paid when the loan is redeemed. Serviced interest is paid monthly from the borrower’s own cashflow. Each approach affects the net funds available, the debt balance over time and the amount of cash the developer must keep in reserve.

For example, retained interest can reduce the cash received on day one, which matters if the deposit and early-stage invoices are tight. Rolled-up interest preserves monthly cashflow but increases the redemption figure. Serviced interest can reduce total debt growth, but only works where the borrower has reliable income outside the project. There is no universally better choice – the right answer depends on the project cashflow and exit.

Before accepting terms, model the full borrowing requirement, not just the advertised facility. YFA’s development finance calculator can help test the relationship between borrowing, costs, projected value and available equity, but lender terms still need to be reviewed against the actual drawdown schedule and valuation assumptions.

Choose the facility around the exit

Every development loan needs a clear repayment route. The usual exits are sale of the completed units, refinancing onto buy-to-let or commercial finance, or a development exit facility where the works are complete but time is needed to sell or stabilise the asset.

Selling can repay the loan promptly, but it exposes the project to market timing and sales progression. Refinancing can retain a completed asset and create long-term income, but the refinance lender will assess rent, completed value, affordability and borrower profile at that later date. A developer should not assume the GDV alone guarantees a refinance at the required level.

Development exit finance can be useful where practical completion has been achieved and the main development lender needs repaying before all units sell. It may offer more time to market stock, although it is another short-term facility with its own costs and criteria. It should be planned before the original loan term becomes tight, not sought after an extension request has already been made.

At Your Financial Assurance, we structure developer finance around the exit from the beginning, then manage lender negotiation, valuation, legal process and drawdowns through to completion. Whole-of-market access is valuable here because appetite differs significantly between lenders. One may prefer experienced housebuilders, another may consider a first conversion with strong professional support, while another may take a more practical view of an unusual site but require a larger equity contribution.

Prepare before you offer on the site

Speed is useful only when the information is ready. Before committing to a purchase, prepare a clear development appraisal, copies of planning documents, drawings, build costings, contractor details, anticipated programme and evidence for the proposed GDV. Be candid about any planning conditions, title issues, party-wall considerations or existing finance.

Also leave room for the less visible costs: professional fees, warranties, utilities, finance costs, sales fees, contingency and tax. A project that works only if every estimate is achieved exactly is not well capitalised. The strongest proposals show that the borrower understands where pressure could arise and has a credible response if it does.

The best development funding arrangement is not necessarily the highest headline facility. It is the one that gives the scheme enough day-one capital, releases build funds when needed and leaves a realistic route to repayment when the works are complete.

Lending is subject to status, valuation and lender criteria. Unregulated bridging, buy-to-let and most development finance are not regulated by the Financial Conduct Authority.