Let’s discuss property development finance. Property development can be an exciting opportunity, whether you’re an experienced developer taking on your next project or you’re considering your first development.
But turning a property opportunity into a successful development requires more than finding the right site.
You’ll need to consider the purchase price, professional fees, construction costs, planning, the expected end value of the completed development and, crucially, how you’re going to fund the project from start to finish.
For many developers, development finance forms an important part of that funding structure.
Development finance is specialist property finance designed specifically to help fund development projects. However, it isn’t a one-size-fits-all product. The amount you can borrow, the terms available and the lenders willing to consider the project can all depend on the details of the development.
In this guide, Mallard Commercial Finance explains how development finance works, what lenders look for and some of the key considerations developers should understand before starting a project.
What is development finance?
Development finance is a form of specialist property finance used to fund the costs associated with a property development.
Depending on the project and lender, this can potentially include funding towards:
- Purchasing land or an existing property
- Construction costs
- Refurbishment
- Professional fees
- Other eligible development costs
Development finance is generally structured around the individual development rather than simply the borrower’s personal income.
The lender will want to understand the project, its costs, its expected value and how the finance will ultimately be repaid.
This makes development finance very different from a standard residential or commercial mortgage.
What types of property development can development finance fund?
Development finance can potentially be used for a wide range of projects.
For example:
- New-build residential developments
- Conversion projects
- Refurbishment and redevelopment
- Commercial developments
- Mixed-use developments
- Converting existing buildings into residential units
- Small property development projects
- Larger multi-unit developments
The type and scale of the project will influence which lenders may be suitable.
A developer planning to convert a single property into several residential units will have a very different funding requirement from a developer constructing a large commercial or mixed-use scheme.
This is why development finance needs to be considered on a project-by-project basis.
How does development finance work?
Development finance is generally arranged around the different stages of a development.
A typical project might involve:
1. Site acquisition
The developer purchases the land or existing property.
2. Development works
Funds are drawn down as construction or development work progresses.
3. Completion
The development is completed and the properties are ready for sale, occupation or refinance.
4. Exit
The development finance is repaid, usually through the sale of the completed properties or refinancing.
The precise structure will depend on the project, lender and funding requirements.
Unlike a conventional mortgage where the full loan may be advanced at completion, development finance can involve staged draw-downs linked to the progress of the development.
This allows funding to be released as costs are incurred, subject to the terms agreed with the lender.
How much development finance can you borrow?
There isn’t a single figure that applies to every development.
Lenders will consider the overall project, including the cost of the land, development costs and the expected value of the completed development.
Two terms you’ll often encounter are Loan to Cost (LTC) and Loan to Value (LTV).
What is Loan to Cost?
Loan to Cost refers to the amount being borrowed compared with the total cost of the development.
For example, if the total project cost is £1 million and the proposed borrowing is £700,000, the loan represents 70% of the total project cost.
What is Loan to Value?
Loan to Value compares the borrowing against the value of the property or development.
For a development project, lenders may also consider the Gross Development Value (GDV).
The available funding will depend on the lender, the project and the overall strength of the application, so developers shouldn’t assume that a particular percentage will automatically be available.
What is Gross Development Value (GDV)?
Gross Development Value, commonly shortened to GDV, is the estimated market value of the completed development.
For example, imagine a developer is converting a building into eight apartments.
Once completed, the eight apartments are expected to have a combined value of £2.4 million.
The estimated £2.4 million would be the development’s GDV.
GDV is an important part of a development finance application because it helps the lender understand the potential value of the completed project.
However, lenders will want to be comfortable that the proposed GDV is realistic.
This is why an independent valuation and a robust development appraisal can be important parts of the funding process.
What do development finance lenders look for?
A lender will want to understand both the development itself and the people behind it.
Several factors can influence how an application is assessed.
1. The development site
The site is fundamental to the project.
Lenders may consider:
- Location
- Existing property or land
- Purchase price
- Planning position
- Proposed development
- Site condition
- Market demand
- Expected end value
A development in an established location with strong demand may present a different proposition from a project in an area where selling the completed units could be more challenging.
2. Planning permission
Planning can be a critical consideration.
Depending on the project, the lender may want to understand whether planning permission has been granted and whether the proposed development is capable of being delivered under the relevant planning consent.
The planning position should therefore be considered early when assessing the viability of a development.
3. The total development costs
A lender will want to understand how much the project is expected to cost.
This can include:
- Land or property purchase
- Construction costs
- Materials
- Labour
- Professional fees
- Planning costs
- Building control
- Architect fees
- Legal costs
- Contingency
- Finance costs
A detailed and realistic development appraisal is essential.
Underestimating costs can create problems later, particularly if construction costs increase during the project.
4. Your development experience
Experience can be an important consideration for lenders.
They may want to understand:
- Previous developments you’ve completed
- The size and complexity of those projects
- Your experience in the relevant property sector
- Your track record of completing projects successfully
This doesn’t necessarily mean that first-time developers cannot obtain development finance.
However, an inexperienced developer may need to demonstrate that they have surrounded themselves with an appropriate professional team and have a robust plan for delivering the project.
5. The professional team
A development isn’t completed by the developer alone.
Depending on the project, a lender may want to understand who is involved, including professionals such as:
- Architects
- Quantity surveyors
- Contractors
- Project managers
- Planning consultants
- Solicitors
- Sales agents
Having an experienced team can help demonstrate that the project has been properly considered and that the developer has access to the expertise required to deliver it.
6. The developer’s contribution
Developers will typically be expected to have some financial involvement in the project.
This could come from cash, existing property equity or other sources, depending on the structure of the transaction.
The amount required will depend on factors including the lender, project costs, property value and overall risk profile.
7. The exit strategy
Just as with bridging finance, the exit strategy is fundamental.
The lender needs to understand how the development finance will be repaid once the project reaches the appropriate stage.
Common exits include:
- Selling the completed properties
- Refinancing onto longer-term investment finance
- Refinancing individual units
- A combination of sales and refinancing
For example, a developer might intend to sell six completed apartments and retain two as rental investments.
The development finance could then be repaid using the proceeds from the sales, with separate investment finance arranged for the retained properties.
The important thing is that the proposed exit needs to be realistic and supported by the overall project appraisal.
Can first-time developers get development finance?
Yes, it may be possible.
However, first-time developers may face additional challenges because they don’t have an established track record of completing similar projects.
This doesn’t automatically mean that finance isn’t available.
A lender may instead place greater emphasis on other aspects of the proposal, such as:
- The viability of the development
- The developer’s professional background
- The experience of the project team
- The contractor
- The planning position
- The developer’s financial contribution
- The proposed exit strategy
- The location and demand for the completed properties
For someone undertaking their first development, getting specialist advice early can be particularly useful.
A commercial finance broker can help identify lenders whose approach is potentially better suited to the project and experience of the developer.
Can development finance be used for refurbishment?
Potentially.
Some development finance arrangements can be used for projects involving significant refurbishment, conversion or redevelopment.
However, the distinction between refurbishment finance, bridging finance and development finance can sometimes be blurred.
For example, a straightforward property refurbishment might be more appropriately funded using bridging finance, while a larger project involving structural changes and multiple units may require a development finance structure.
The right option will depend on the scale and nature of the works.
This is why it’s important to consider the funding requirement before committing to the purchase.
Development finance vs bridging finance: what’s the difference?
Both are specialist forms of property finance, but they are designed for different purposes.
| Development finance | Bridging finance |
|---|---|
| Designed specifically for property development projects | Generally designed for short-term funding |
| Can fund construction and development costs | Can be used for purchases, refurbishment and funding gaps |
| Often structured around staged development costs | Usually structured around a defined short-term requirement |
| Commonly linked to the project’s GDV and total costs | Often focused on the security and exit strategy |
| Repaid through sale or refinance of the completed development | Repaid through a defined exit such as sale or refinance |
There can also be situations where both forms of finance play a role in the same project.
For example, bridging finance could potentially be used to acquire a site quickly, followed by development finance once the project is ready to proceed.
The suitability of this approach depends on the individual transaction.
What is a development appraisal?
A development appraisal is a financial assessment of the proposed project.
It should give you a clear picture of whether the development is financially viable.
A development appraisal can include:
Purchase costs
How much will the site or existing property cost?
Development costs
What will the construction, refurbishment or conversion cost?
Professional fees
What will you need to budget for architects, surveyors, planning consultants and other professionals?
Finance costs
What will the development finance cost over the expected term?
Contingency
What happens if costs increase or unexpected problems arise?
Gross Development Value
What is the estimated value of the completed development?
Sales costs
If the properties are being sold, what will the marketing, estate agency and legal costs be?
Developer profit
Once all costs have been taken into account, what margin remains?
This information can help you and your finance adviser understand whether the project is commercially viable and how much funding may be required.
Why is developer profit important?
A lender isn’t simply looking at whether the development can be completed.
They also need to understand whether the project makes commercial sense.
If the projected development costs are very close to the expected GDV, there may be limited room for unexpected costs or changes in market conditions.
A healthy projected profit margin can provide greater comfort that the development has been properly assessed.
However, projected profit is only as reliable as the assumptions behind it.
Overestimating the final sale values or underestimating construction costs can make a development appear more profitable on paper than it really is.
This is why realistic figures are essential.
What happens if development costs increase?
Construction projects don’t always go exactly according to plan.
Materials, labour and professional costs can change, while unexpected issues can arise once work begins.
This is why contingency should be considered when putting together the initial development appraisal.
If costs do increase, the developer may need to find additional funding.
Depending on the circumstances, options could include additional borrowing, restructuring the existing finance, contributing additional capital or adjusting the development strategy.
The earlier a potential funding issue is identified, the more options you may have.
How is development finance repaid?
Development finance is generally intended to be repaid once the development reaches an agreed exit point.
The most common exit strategies are:
Selling the completed properties
The developer sells some or all of the completed units and uses the proceeds to repay the development finance.
Refinancing
The completed development may be refinanced onto longer-term investment finance.
This can be particularly relevant if the developer intends to retain the completed properties as rental investments.
A combination of sale and refinance
Some developers sell part of a development while retaining other units.
The proceeds from the sales can be used to reduce or repay the development finance, with longer-term finance arranged against the retained properties.
The appropriate exit will depend on the developer’s strategy and the lender’s requirements.
How long does development finance take to arrange?
Timescales vary depending on the complexity of the project, lender, planning position, valuation and how quickly the required information can be provided.
A straightforward project with a clear planning position and comprehensive documentation may be easier to assess than a complex development with outstanding planning or an unusual property.
This is another reason to start the funding conversation early.
Ideally, you should understand your potential funding structure before committing to the development purchase.
Common development finance mistakes to avoid
Underestimating the total cost
Construction costs aren’t the only expense.
Make sure your appraisal considers professional fees, finance costs, taxes, legal costs and an appropriate contingency.
Overestimating the finished value
An optimistic GDV can make a project look more attractive than it really is.
Use realistic and supportable figures when assessing the potential end value.
Failing to plan the exit
Don’t wait until construction is complete to think about how the development finance will be repaid.
Your exit strategy should form part of the original project plan.
Assuming your previous lender will automatically fund the next project
A lender that was suitable for one development isn’t necessarily the right lender for another.
The size, location, property type and structure of every project can be different.
Applying for finance too late
Development finance can involve valuations, legal work, underwriting and detailed project assessment.
Starting early gives you more time to identify and address potential issues.
Not allowing for unexpected costs
Even well-planned developments can encounter unexpected expenses.
A realistic contingency can help protect the project if costs increase.
Why use a development finance broker?
Development finance is specialist lending, and different lenders can have very different criteria.
One lender may be comfortable with a particular property type or development size, while another may take a different approach.
A specialist broker can help you understand the potential funding options and identify lenders that may be appropriate for the project.
At Mallard Commercial Finance, we work with a broad range of lenders, from high-street banks to specialist providers, helping clients explore funding solutions for commercial and property-related transactions.
Our approach starts with understanding the project.
That means looking at the proposed development, costs, planning position, experience, funding requirement and exit strategy before considering potential lenders.
Mallard Commercial Finance: development finance expertise
A successful property development starts long before construction begins.
Understanding the numbers, assessing the viability of the project and putting an appropriate funding structure in place can all help give your development the best possible foundation.
At Mallard Commercial Finance, we understand that no two development projects are the same.
Whether you’re an experienced developer planning your next project or considering your first development, our team can help you explore the commercial finance options available.
With access to a broad lender panel and experience across commercial and specialist finance, we can help you navigate what can otherwise be a complex funding process.
Planning your next property development?
If you’re considering purchasing a site, converting an existing property or starting a new development project, speak to Mallard Commercial Finance about your funding requirements.
The earlier you understand your development finance options, the better placed you can be to assess whether your project is financially viable and plan your next steps.
Frequently Asked Questions
What is development finance?
Development finance is specialist property finance designed to help fund the costs of a property development. Depending on the project and lender, this can potentially include land or property acquisition, construction and other eligible development costs.
How much development finance can I borrow?
The amount available depends on factors including the total development cost, the value of the site, the expected Gross Development Value, the lender and the overall strength of the project.
What is GDV in property development?
GDV stands for Gross Development Value. It is the estimated market value of the completed development and is an important consideration when assessing the potential funding available for a project.
What is Loan to Cost?
Loan to Cost, or LTC, compares the amount borrowed with the total cost of the development. It is one of the measures lenders can use when assessing development finance.
What is Loan to Value?
Loan to Value, or LTV, compares the amount borrowed with the value of the property or development. LTV is one of the factors a lender may consider when assessing a development finance application.
Can first-time developers get development finance?
Potentially. A lack of previous development experience doesn’t automatically prevent someone from obtaining development finance. However, lenders may place greater emphasis on the project, professional team, planning position, financial contribution and overall viability.
Can development finance be used for refurbishment?
Potentially. Depending on the scale and nature of the project, development finance or bridging finance may be appropriate for refurbishment and conversion projects.
What can development finance be used for?
Depending on the lender and project, development finance can potentially be used for land or property acquisition, construction, conversion, refurbishment and other eligible development costs.
How is development finance repaid?
Development finance is commonly repaid through the sale of completed properties, refinancing onto longer-term finance or a combination of the two.
Do I need planning permission before applying for development finance?
The planning position is an important consideration for development finance. Requirements can vary depending on the lender and project, so it is worth discussing the planning status with a specialist finance broker before proceeding.
How long does development finance last?
The term depends on the project, lender and expected development timescale. The finance will generally be structured to cover the anticipated period required to complete the development and reach the planned exit.
Should I use a development finance broker?
You don’t have to use a broker, but development finance can involve complex lender criteria and project assessments. A specialist broker can help you understand potential funding options and identify lenders that may be suitable for the project
