The Complete UK Developer's Guide to Funding Your Next Development

By Always Wright Mortgages Limited

Development Finance | Complex Finance | Bridging | Commercial Finance

INTRODUCTION

Property development can be highly profitable.

It can also be one of the most financially demanding areas of property investment.

A developer may find an excellent site, obtain planning permission, establish a strong gross development value and have an experienced construction team ready to deliver the project — yet still struggle to obtain the right funding structure.

The reason is simple.

Development finance isn't just about borrowing money.

It is about constructing a funding structure that works across the entire lifecycle of the development.

That means considering:

the acquisition;
the land value;
planning;
construction costs;
professional fees;
contingency;
finance costs;
developer equity;
lender requirements;
construction risk;
the experience of the developer;
the experience of the contractor;
the projected gross development value;
the development programme; and
most importantly, the exit strategy.

At Always Wright Mortgages, we specialise in helping developers navigate these complexities.

Our approach is not simply:

"How much do you want to borrow?"

It is:

"What is the most appropriate way to structure this entire development?"

That distinction can make a significant difference.

1. WHAT IS DEVELOPMENT FINANCE?

Development finance is funding specifically structured to help finance the acquisition, construction, conversion or redevelopment of property.

Unlike a standard residential mortgage, development finance is generally designed around the economics of a project.

A lender may assess:

Land value

Construction costs

Professional costs

Finance costs

Contingency

against:

Gross Development Value

The lender is therefore looking at both the cost of creating the development and the value of the finished scheme.

This is one reason development finance can be considerably more complex than conventional property finance.

2. WHAT CAN DEVELOPMENT FINANCE BE USED FOR?

Depending on the lender and structure, development finance can potentially be used for a wide range of projects.

These can include:

New-build residential developments

For example:

houses;
apartments;
townhouses;
luxury homes;
multi-unit developments.

Commercial developments

Including:

offices;
retail;
industrial;
warehouses;
mixed-use schemes.

Conversion projects

For example:

offices to residential;
commercial to residential;
HMOs;
flats;
barn conversions;
existing buildings being substantially remodelled.

Refurbishment and redevelopment

Where an existing building requires significant works or a redevelopment programme.

Part-completed developments

These can be more complicated because the lender needs to understand:

what has already been spent;
what remains to be spent;
the current value;
the outstanding debt;
the cost to complete;
the contractor position; and
the proposed exit.

This is exactly where specialist structuring can become particularly important.

3. HOW MUCH CAN YOU BORROW?

One of the most common questions developers ask is:

"How much will a lender lend?"

There isn't one universal answer.

A lender may consider several different measurements.

The three terms developers should understand are:

LTV

Loan-to-Value

LTC

Loan-to-Cost

LTGDV

Loan-to-Gross-Development-Value

These measures can interact with one another.

A developer may therefore have a project that looks attractive from one perspective but doesn't work from another.

4. LOAN-TO-COST — LTC

Loan-to-Cost measures the proposed borrowing against the total development cost.

For example:

Total development cost: £4m

Loan: £3.2m

The LTC would be:

£3.2m ÷ £4m = 80%

Therefore:

LTC = 80%

This gives a lender an indication of how much of the total project cost the developer is seeking to finance.

5. LOAN-TO-GDV — LTGDV

LTGDV compares the loan against the anticipated value of the completed development.

Suppose:

Loan: £3.2m

GDV: £5m

Then:

£3.2m ÷ £5m = 64%

Therefore:

LTGDV = 64%

This is important because the lender is not simply considering what the project costs.

It is also considering what the completed development is expected to be worth.

6. WHY GDV MATTERS

Gross Development Value is the estimated value of the completed development.

For example:

A developer plans to construct:

10 houses

Average anticipated sale value:

£500,000

Estimated GDV:

£5m

However, a developer should not simply assume that:

10 × £500,000 = £5m

and therefore the lender will automatically accept £5m.

The valuation needs to support the proposed GDV.

A lender will normally want confidence that the completed units can realistically achieve the projected values.

Factors can include:

location;
comparable sales;
property specification;
unit sizes;
demand;
market conditions;
sales evidence;
planning;
quality of construction;
proposed tenure;
development design.

7. THE DEVELOPMENT APPRAISAL

Before approaching a lender, the developer should understand the entire financial model.

A basic appraisal might look like this:

CostAmountLand £1,000,000

Construction £2,000,000

Professional fees £200,000

Contingency £150,000

Finance costs £200,000

Marketing/sales £50,000

Total Cost £3,600,000

GDV £5,000,000

Gross Profit £1,400,000

The developer can then begin assessing:

Profit on Cost

£1.4m ÷ £3.6m

= 38.9%

That can be an important indicator of the overall attractiveness of the project.

But the lender will still consider the individual risks.

8. THE IMPORTANCE OF DEVELOPER EQUITY

Developers should understand that a lender funding a project does not necessarily mean the lender will fund every pound required.

The developer may need to contribute equity.

For example:

Total project cost: £4m

Potential senior development facility:

£3.2m

Developer contribution:

£800,000

The exact structure will depend on the lender, project and circumstances.

Developer equity demonstrates financial commitment and provides a buffer against project risk.

However, there are also more sophisticated ways of structuring developer equity in certain circumstances.

This is where a specialist broker can add significant value.

9. WHAT DOES THE LENDER ACTUALLY LOOK AT?

A lender is assessing more than the property.

They are assessing the whole transaction.

This can include:

The developer

What experience does the developer have?

Have they completed similar projects?

What has their previous track record looked like?

The contractor

Who is building the project?

What similar developments have they completed?

What is their financial position?

The planning

Is planning already granted?

Are there conditions?

Are there outstanding matters?

The numbers

Does the appraisal make sense?

The valuation

Does the GDV appear realistic?

The security

What property or assets are available?

The exit

How will the lender be repaid?

The market

What happens if the market changes?

This is why submitting a development finance application is fundamentally different from submitting a straightforward residential mortgage application.

10. WHY CONTRACTOR EXPERIENCE MATTERS

A strong developer can still encounter difficulty if the construction team is not suitable for the project.

Lenders may want to understand:

previous projects;
construction experience;
financial strength;
insurance;
contract structure;
programme;
costings;
professional team;
ability to deliver.

For a large development, the contractor can represent a significant part of the lender's risk assessment.

This is why Always Wright recommends developers consider their construction team early.

11. FIXED-PRICE CONTRACTS

A lender may want certainty around construction costs.

A properly structured contract can therefore be an important part of the funding proposal.

The precise requirements vary by lender.

But the underlying principle is straightforward:

The lender wants confidence that the development can be completed within the proposed budget.

If the initial build budget is £2m but the actual cost becomes £2.7m, the funding structure can come under pressure.

That is why realistic costings and appropriate contingency are essential.

12. CONTINGENCY

Developments rarely go exactly according to plan.

There may be:

material price changes;
ground conditions;
design changes;
planning requirements;
delays;
labour costs;
unexpected structural issues.

A sensible appraisal therefore needs to account for risk.

The exact contingency appropriate to a project will depend on the nature of the works.

A specialist QS can be particularly important in larger or more complicated developments.

13. DEVELOPMENT FINANCE INTEREST

Another important consideration is the cost of finance.

Developers need to understand whether interest is:

Serviced

Paid during the term of the facility.

or:

Rolled up

Added to the loan and generally repaid when the facility exits.

The structure can have a significant impact on:

monthly cash flow;
total project cost;
required equity;
facility size;
profitability.

Therefore, the headline interest rate should never be considered in isolation.

A lower rate does not automatically mean a better facility.

14. WHY THE CHEAPEST RATE ISN'T ALWAYS THE BEST DEAL

Suppose:

Lender A

Interest rate: lower

But requires:

greater developer equity;
lower LTC;
more restrictive monitoring;
less flexibility.

Lender B

Interest rate: slightly higher

But provides:

stronger leverage;
better cash flow;
more appropriate drawdown structure;
better alignment with the construction programme.

The second option could potentially be commercially more attractive despite the higher headline rate.

This is why development finance should be assessed based on the whole structure, not just the rate.

15. THE IMPORTANCE OF THE EXIT

Before agreeing development finance, you should ask:

How is this loan going to be repaid?

Common exits can include:

Sale

Sell the completed properties.

Refinancing

Refinance onto longer-term finance.

Buy-to-let

Retain the properties and refinance onto investment finance.

Commercial refinance

For commercial or mixed-use developments.

Portfolio refinance

Refinance multiple properties together.

A strong development proposal should have a credible exit strategy.

16. COMMON REASONS DEVELOPMENT FINANCE APPLICATIONS FAIL

1. Unrealistic GDV

The developer assumes values that aren't supported by the market.

2. Underestimated construction costs

The project is not adequately costed.

3. Insufficient equity

The developer doesn't have enough funds to support the proposed structure.

4. Weak contractor

The construction team doesn't provide enough confidence.

5. Inexperienced developer

The project may be too large compared with the developer's previous experience.

6. Poor documentation

Information is missing or inconsistent.

7. No credible exit

The lender can't see how it will be repaid.

8. Existing debt

The current facility creates insufficient room for the proposed development finance.

9. Planning uncertainty

The planning position isn't sufficiently established.

10. Application submitted too early

The developer approaches lenders before the project is properly structured.

17. WHEN SHOULD YOU SPEAK TO A DEVELOPMENT FINANCE SPECIALIST?

Ideally:

Before committing to the site.

This doesn't necessarily mean you need to have every document ready.

It means you should understand whether the project is potentially financeable before making irreversible commitments.

A specialist can help you consider:

likely funding requirements;
potential leverage;
equity requirements;
development costs;
lender appetite;
possible structure;
exit strategy;
potential problems.

This can be particularly valuable when dealing with:

large developments;
unusual properties;
complex ownership;
existing bridging;
planning complications;
limited equity;
multiple security;
part-completed developments;
large construction contracts.

18. THE £5M+ QUESTION

Once a development becomes larger, the complexity can increase substantially.

A £500,000 development and a £25m development are not simply the same transaction with an extra zero.

Larger developments may involve:

multiple funding sources;
institutional lenders;
senior debt;
mezzanine;
equity;
forward funding;
joint ventures;
complex security;
multiple SPVs;
phased construction;
multiple exits.

The funding structure therefore needs to be considered alongside the wider commercial structure of the project.

19. A SIMPLE EXAMPLE

Consider a hypothetical development.

Acquisition

£2m

Construction

£5m

Professional fees

£500k

Contingency

£400k

Finance

£600k

Other costs

£100k

Total

£8.6m

Expected GDV:

£12m

Potential gross profit:

£3.4m

That looks attractive at first glance.

But the lender will want to understand:

Who is the developer?
Who is the contractor?
Is planning secured?
Is £5m enough for construction?
Is £12m supported by valuation?
What equity is available?
What is the exit?
What happens if sales values fall?
What happens if construction costs increase?
What happens if the programme is delayed?

That is the difference between looking at a development as a property purchase and looking at it as a funding transaction.

20. THE ALWAYS WRIGHT APPROACH

At Always Wright Mortgages, our approach is centred around understanding the deal before approaching the market.

We look at the wider picture.

The site

What are you buying?

The planning

What can you build?

The numbers

What will it cost?

The GDV

What will it be worth?

The developer

Who is delivering it?

The contractor

Who is building it?

The funding

How much is required?

The equity

What is available?

The exit

How is the lender repaid?

The risk

What could go wrong?

This is particularly important when dealing with complex developments.

21. THE 15-POINT DEVELOPMENT FINANCE CHECKLIST

Before approaching a lender, make sure you can answer:

1. What are you buying?

2. What is the purchase price?

3. What planning is in place?

4. What are you building?

5. How many units are involved?

6. What is the GDV?

7. What will construction cost?

8. What are the professional fees?

9. What contingency is included?

10. What finance is required?

11. How much equity can you contribute?

12. Who is the contractor?

13. What is your development experience?

14. What is the exit strategy?

15. What could prevent the project from completing successfully?

If you can answer all 15, you are in a much stronger position to start discussing funding.

22. THE MOST IMPORTANT LESSON

Development finance shouldn't be viewed as:

"I have a site. How much can I borrow?"

It should be viewed as:

"I have a development opportunity. How do we structure the entire transaction so the project can be acquired, constructed and exited successfully?"

That change in thinking can fundamentally improve the way developers approach finance.

23. FINAL DEVELOPER CHECK

Before committing to a site, ask yourself:

Does the development work?

Not just on paper — commercially.

Does the GDV have supporting evidence?

Are the construction costs realistic?

Is there enough contingency?

Is the developer contribution achievable?

Is the contractor appropriate?

Is the finance structure realistic?

Is the exit credible?

What happens if the project takes six months longer?

What happens if the GDV falls?

What happens if construction costs rise?

These are the questions that should be considered before the project becomes a funding problem.

READY TO DISCUSS YOUR DEVELOPMENT?

Let's work out how your project could be funded.

Whether you're:

Buying a site

Seeking planning

Starting a new-build development

Refinancing existing debt

Rescuing a part-completed project

Building 5 units or 50 units

or planning a £5m+ development

Always Wright Mortgages can help you assess the potential funding structure.

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