Development Finance

Development finance can provide funding for purchasing land, constructing new properties or converting existing buildings.

One of the main benefits is that construction funding can be released in stages as work progresses, rather than requiring the developer to fund the entire build upfront.

Depending on the lender and project, interest may be retained or rolled up during the loan term rather than paid monthly.

However, development finance can involve arrangement fees, valuation costs, monitoring surveyor fees and interest charges. The overall cost and funding structure should be considered alongside the expected profit from the development.

Development finance is highly customisable, catering to various project types, including residential and commercial developments, renovations, new builds, and more.

Options include development exit funding, regulated development finance, and mezzanine finance, each tailored to specific project requirements.

Eligibility for development finance depends on presenting a viable project with a Gross Development Value (GDV) supported by market research.

Having development experience or a team with experience enhances eligibility.

Development finance is usually repaid through the sale of the completed properties or by refinancing onto longer-term borrowing.

If the development is complete or nearing completion, but additional time is needed to sell the properties, development exit finance may be available.

This can provide extra time to arrange sales or refinancing, although the costs, loan term and lender requirements will need to be considered carefully.

Most lenders require full planning permission before offering finance, although some may proceed with outline permission.

Development loan terms can last up to 24 months, depending on the project’s complexity. Simple refurbishments may need only a 6-month loan, while more extensive new builds could require the full 24 months.

Joint venture development finance involves a developer working with a funding partner who contributes capital towards a property development in return for an agreed share of the profits.

Some joint venture arrangements may provide funding for most or all of the development costs, although this depends on the project’s viability, the developer’s experience and the funding partner’s requirements.

These arrangements are often structured through a Special Purpose Vehicle (SPV), with the parties agreeing how responsibilities, control and profits will be divided.

Development finance is commonly released in stages. An initial advance may be used towards purchasing the development site, with further funds made available as construction progresses.

Lenders will usually require progress inspections, often carried out by a monitoring surveyor, before authorising additional drawdowns.

The timing and amount of each release depend on the lender’s requirements, the agreed funding schedule and the work completed.

Developers should allow for potential gaps between construction expenses and the release of funds.

Profit on GDV measures the expected development profit as a percentage of the completed property’s Gross Development Value.

It is calculated by subtracting the total development costs from the GDV, dividing the result by the GDV and multiplying by 100.

For example, if a development has an expected GDV of £1 million and total costs of £800,000, the anticipated profit is £200,000, representing a 20% profit on GDV.

Development costs should include the site purchase, construction, professional fees, finance costs, contingency and selling expenses.

Lenders assess profitability alongside other factors, including development experience, project complexity and the intended exit strategy. Minimum profit requirements vary between lenders.