Development Finance: Why Structuring the Deal Matters More Than Finding the Money

Always Wright Mortgages Limited

Property development finance is often misunderstood. Many developers believe that securing funding is simply a case of finding a lender willing to provide the money. In reality, the most important part of a successful development transaction often happens before a lender is even approached.

It is about understanding the project, identifying the financial challenges, assessing the risks and structuring the transaction so that the development is commercially viable.

At Always Wright Mortgages, this is where we specialise.

I founded the business to help property investors and developers navigate the more complicated areas of property finance. We work across development finance, bridging finance and commercial finance, helping clients with transactions that don't necessarily fit traditional lending criteria.

I often describe our approach as being about structuring finance rather than simply finding finance.

What actually makes a property development deal complex?

A complex development isn't necessarily defined by its size. It is often the combination of circumstances surrounding the transaction that makes it difficult.

It could involve acquiring land without planning permission, refinancing an existing development facility, funding a partially completed scheme, dealing with multiple property titles, managing cash-flow constraints or finding a solution where the developer's available capital doesn't quite meet the lender's requirements.

We regularly look at projects involving:

• Ground-up residential developments.

• Multi-unit developments and HMOs.

• Commercial-to-residential conversions.

• Hotels, care homes and commercial properties.

• Land acquisitions and strategic land opportunities.

• Bridging, refurbishment and development exits.

• Joint ventures, mezzanine funding and deferred land payments.

The key is understanding the entire transaction rather than looking at the borrowing requirement in isolation.

A lender might decline a project based on how it has been presented, but that doesn't automatically mean the underlying development is unfinanceable. Sometimes the structure needs to change.

How does development finance actually work?

Development finance is fundamentally different from conventional property lending.

A lender will generally assess the purchase price or current land value, construction costs, professional fees, the developer's experience, the proposed gross development value (GDV), planning position and the anticipated exit strategy.

Two particularly important measurements are loan-to-cost (LTC) and loan-to-gross-development-value (LTGDV).

LTC looks at how much of the overall development cost the lender is prepared to fund. LTGDV measures the facility against the projected completed value of the scheme.

However, understanding these percentages is only part of the exercise.

Developers also need to consider staged drawdowns, cash-flow requirements, contingency allowances, interest costs and how much capital they will need to contribute throughout the project.

A development can look profitable on paper but still encounter significant cash-flow difficulties if the funding hasn't been structured correctly.

This is why we look at the complete journey: acquiring the land, funding construction, reaching practical completion and ultimately selling or refinancing the completed units.

Real projects: Where creative structuring makes a difference

One of the best ways to understand the difference between conventional mortgage broking and specialist development finance is to look at actual transactions.

1. Reducing the capital requirement by £145,000 through deferred payments

In one transaction, a developer was looking to acquire a development site with an accepted purchase price of £1.065 million.

The original funding requirement involved approximately £945,000 of private capital.

Rather than simply accepting that requirement, we examined the transaction and considered whether the land purchase and construction expenditure could be structured differently.

We proposed a deferred-payment arrangement that allowed part of the development costs to be brought into line with the project's affordability.

The resulting structure reduced the immediate capital requirement from £945,000 to £800,000.

That released £145,000 of capital for the developer.

The structure included £670,000 towards the land acquisition and £130,000 towards construction.

The development involved four semi-detached houses, each with an anticipated value of £675,000, alongside a larger fifth plot with an anticipated value of £1.7 million.

This is a good example of why development finance isn't always about increasing the loan. Sometimes the better solution is to change how and when the money is required.

2. A five-house residential development

Another transaction involved a five-house residential development.

The land acquisition was approximately £2.07 million, with anticipated construction costs of £3.75 million.

We structured a development finance facility of approximately £5.25 million, representing 70% of the projected £8 million gross development value.

The scheme involved five substantial detached properties, each measuring approximately 3,000 square feet.

The challenge with developments of this nature is ensuring that the land acquisition, construction funding and anticipated sales values all work together.

It isn't enough to establish that a lender will fund the purchase. The developer needs a viable funding structure that carries the project through to completion.

3. A five-unit residential development

We also worked on a five-unit residential development involving approximately £1.06 million in land costs and £1.6 million in construction expenditure.

The anticipated gross development value was £4.4 million.

Projects like this demonstrate the importance of assessing the relationship between land value, construction costs, the final development value and the amount of finance required.

The right structure needs to reflect the commercial realities of the scheme rather than simply applying a standard lending formula.

4. A nine-plot development

Another example involved a nine-plot development.

The project had an existing funding structure that needed to be reviewed and replaced with a more appropriate facility.

The transaction involved an existing facility of approximately £2.4 million, with a proposed replacement facility of £1.9 million.

The development had an anticipated gross development value of £4.8 million, with approximately £1.2 million required to complete the works.

The proposed structure was designed around a 12-month construction period followed by a six-month sales period.

Transactions like this require an understanding of the existing debt, the remaining construction costs, the lender's requirements and the proposed exit.

These are not simply mortgage applications. They are financial structures that need to work commercially.

When does bridging finance make sense?

Bridging finance is an important tool for property investors and developers, but it needs to be used for the right reasons.

It can be particularly useful when purchasing at auction, securing a property quickly, completing a chain-break transaction, acquiring a site requiring refurbishment or buying an asset that isn't immediately suitable for conventional mortgage finance.

It can also play an important role in development projects where an existing facility needs to be refinanced or an asset needs to be moved into a more suitable funding structure.

However, bridging finance should never be viewed as a long-term strategy without a clear and realistic exit.

Before arranging a bridging facility, I want to understand exactly how the loan will be repaid.

Will the property be sold? Will it be refinanced onto a term facility? Will the development be completed and sold as individual units?

The exit strategy needs to be credible from the outset, not something that is worked out when the loan approaches maturity.

What mistakes do developers make when arranging finance?

One of the biggest mistakes is approaching lenders before fully understanding the financial requirements of the project.

Developers sometimes concentrate on the purchase price and forget about the wider costs involved in completing a development.

Construction inflation, professional fees, planning obligations, infrastructure requirements, contingency allowances and interest can all have a significant impact.

Another common issue is underestimating the amount of capital required.

Having sufficient funds for the land purchase doesn't necessarily mean that a developer has sufficient funds to complete the entire project.

I would always encourage developers to have a detailed understanding of their numbers before committing to a purchase.

That means knowing the land cost, construction budget, projected GDV, expected timescales, available capital and exit strategy.

It is also important to understand that the cheapest finance isn't automatically the best finance.

A slightly more expensive facility with appropriate drawdown arrangements, suitable flexibility and a realistic repayment structure may ultimately be better for the project.

Can first-time developers obtain development finance?

Yes, although experience is an important consideration for many lenders.

A first-time developer may not have a completed development portfolio, but that doesn't automatically rule them out.

The strength of the project, the planning position, the professional team, the contractor, the available capital and the proposed exit can all influence how a lender views the application.

There may also be opportunities to work alongside an experienced development partner or structure a joint venture.

The important thing is to present the project properly and understand which lenders are comfortable with the particular circumstances.

What does the future look like for property development finance?

The property finance market continues to evolve. But we need more housing, as the government pledge to build more and provide more housing over the next government.

Developers are having to pay closer attention to construction costs, borrowing costs, affordability and the economic viability of projects.

Lenders are also looking carefully at the quality of applications, the experience of the development team and the underlying strength of each transaction.

I believe this makes specialist advice and proper financial structuring increasingly important.

Developers need more than someone who can introduce them to a lender. They need someone who understands the project, can identify potential problems and knows how to present a transaction in a way that makes commercial sense.

Why Always Wright Mortgages?

At Always Wright Mortgages, we work with property developers, investors and commercial property owners on transactions ranging from individual projects to multi-million-pound development schemes.

We have access to more than 30 lenders and work across a broad range of specialist finance requirements.

Our focus is on understanding the transaction, identifying the challenges and developing a funding structure that supports the client's objectives.

We don't believe every difficult transaction is impossible. Sometimes it simply needs a different approach.

My philosophy is straightforward:

Complex finance made understandable. Difficult deal. Always Wright.

Because in property development, finding the money is only one part of the equation.

Structuring the deal correctly is what makes the difference.

Always Wright Mortgages Limited

Specialists in Complex Property & Development Finance

Website: www.alwayswrightmortgages.co.ukEmail: info@alwayswrightmortgages.co.uk