Understanding Development Finance: A Complete Guide

Development finance is a specialist form of short-term funding designed specifically for property development projects. Whether you're planning a ground-up construction, major refurbishment, or conversion project, understanding development finance is crucial to making your project a success.

What is Development Finance?

Development finance is a short-term loan facility that provides the capital needed to fund property development projects. Unlike traditional mortgages, development finance is released in stages throughout the build process, aligned with construction milestones. This approach protects both the lender and the borrower, ensuring funds are used appropriately and the project progresses as planned.

How Does Development Finance Work?

The typical development finance structure includes:

Stage Payment Release

Funds are released in stages, commonly:

• Stage 1: Land purchase and initial costs
• Stage 2: Foundations complete
• Stage 3: Building weatherproof
• Stage 4: First fix complete
• Stage 5: Practical completion

Each stage release is typically triggered by a monitoring surveyor's inspection, confirming the work has been completed to the required standard.

Senior Debt Structure

Most development finance is structured as senior debt, typically offering:

• Land: Up to 70% LTV (Loan-to-Value)
• Build Costs: Up to 100% of construction costs
• Combined: Usually capped at 65-70% of Gross Development Value (GDV)

Key Terms You Need to Know

**Gross Development Value (GDV)**: The total value of the completed development, based on professional valuation.

**Loan-to-GDV**: The percentage of the total development value that the lender will provide. Typically 60-70%.

**Loan-to-Cost (LTC)**: The percentage of total project costs (land + build) that will be financed.

**Net Development Value (NDV)**: GDV minus costs of sale, typically calculated at GDV minus 6-8%.

**Interest Roll-Up**: Interest charges are added to the loan rather than paid monthly, settled when the development is complete and sold or refinanced.

Eligibility Criteria

To secure development finance, you'll typically need:

Experience Requirements

• Previous development experience (though some lenders accept first-time developers with strong teams)
• Demonstrated track record of successful projects
• Evidence of project management capabilities

Financial Position

• Sufficient equity contribution (usually 25-35% of GDV)
• Proof of ability to cover contingency costs
• Strong personal financial position
• Good credit history

Project Requirements

• Detailed planning permission in place
• Professional quantity surveyor's cost report
• Realistic build programme
• Clear exit strategy (sale or refinance)
• Building contractor in place (with appropriate insurance and qualifications)

Types of Development Projects Funded

Development finance can be used for:

• Ground-up construction: New build residential or commercial properties
• Conversions: Transforming buildings from one use to another (e.g., office to residential)
• Refurbishment: Major renovation projects adding significant value
• Change of use: Properties requiring planning permission for new purposes
• Subdivision: Splitting properties into multiple units

Costs to Consider

Development finance involves several cost elements:

Arrangement Fees

Typically 1.5-2% of the total loan facility.

Interest Rates

Generally 6-12% per annum, depending on:

• Loan size
• LTV ratio
• Borrower experience
• Project risk profile
• Market conditions

Exit Fees

Some lenders charge exit fees, typically 1-2% of the loan.

Other Costs

• Legal fees (both yours and the lender's)
• Valuation fees
• Monitoring surveyor fees (charged per inspection)
• Broker fees (if using a broker)

The Application Process

1. Initial Assessment

Discuss your project with a development finance specialist who can assess feasibility and suitable lenders.

2. Documentation Gathering

Prepare comprehensive documentation:

• Planning permission documents
• Architect's plans and specifications
• Quantity surveyor's cost report
• Build programme
• Professional valuations
• Contractor details and quotations
• Your experience portfolio
• Financial statements

3. Lender Submission

Your broker submits to appropriate lenders with detailed project appraisal.

4. Initial Offer

Suitable lenders provide indicative terms, typically within 48-72 hours.

5. Full Underwriting

Chosen lender conducts detailed due diligence:

• Independent valuation
• Legal review
• Credit checks
• Project appraisal

6. Legal Process

Solicitors handle the legal documentation and charges.

7. Completion

Funds are released according to the agreed stage payment structure.

Tips for Success

**Build a Strong Team**: Surround yourself with experienced professionals - architect, quantity surveyor, contractor, and broker.

**Be Realistic**: Use conservative GDV estimates and allow adequate contingency (typically 10-15%).

**Manage Cash Flow**: Ensure you have funds available to cover costs between stage releases.

**Plan Your Exit**: Have a clear strategy for repaying the loan - whether through sale or long-term refinancing.

**Monitor Progress**: Stay closely involved with the build, maintaining communication with your monitoring surveyor.

Exit Strategies

Development finance requires a clear exit route:

Sale on Completion

Most common approach - sell completed units to repay the loan. Ensure your pricing is realistic and you've allowed for sales period in your timeline.

Refinance to Buy-to-Let

If retaining properties for rental income, arrange refinancing to a buy-to-let mortgage before development finance term expires.

Refinance to Commercial Mortgage

For commercial developments, refinance to long-term commercial mortgage based on rental income.

Common Pitfalls to Avoid

• Insufficient contingency: Always budget 10-15% extra for unforeseen costs
• Unrealistic timescales: Build delays are common - allow extra time
• Poor contractor selection: Use established, insured contractors with relevant experience
• Overoptimistic valuations: Use conservative GDV estimates
• Inadequate planning: Ensure all permissions are in place before starting

Conclusion

Development finance is a powerful tool for property developers, enabling projects that would otherwise be unachievable. Success requires thorough planning, realistic projections, a strong team, and careful management throughout the build process.

With the right preparation and professional guidance, development finance can help you unlock significant value and build a successful property development business.

Whether you're a first-time developer or experienced operator, working with a knowledgeable commercial mortgage broker ensures you access the most suitable development finance for your project at competitive rates.