What is development finance?

How lenders use it

A development lender sizes the loan against two numbers. One is the total cost of the project. The other is the expected value of the finished scheme, called the gross development value (GDV). The lender sets a limit on each and lends the lower amount.

The money is not paid out on day one. The lender may advance part of it to buy the land. The rest is released in stages. A monitoring surveyor visits the site, checks that the work is done and confirms what the next stage will cost. Only then does the lender release the next payment.

Before it agrees to lend, the credit team looks at the planning permission, the build contract, the cost plan, the professional team and a valuation of the site and the finished scheme. It also asks how the borrower will repay. That is called the exit. The exit is usually the sale of the units or a refinance.

The borrower's experience matters a great deal. A first-time developer usually gets a lower loan limit or a higher price than one who has finished similar schemes.

Worked example

Example only. A developer plans six flats. Total costs are £1,000,000. That is £400,000 for the land, £500,000 for the build and £100,000 for fees and interest. A valuer puts the finished flats at £1,500,000.

The lender allows a loan of up to 65% of GDV. That is £975,000. It also allows up to 85% of costs. That is £850,000. The lender lends the lower figure, so the loan is £850,000 and the developer puts in £150,000. The limits in this example are made up. Every lender sets its own.

Common confusions

Development finance is not the same as a bridging loan. A bridging loan is short and fast. It usually buys or refinances a property with little or no building work. Development finance funds a build over many months and releases money in stages.

The words also mean something else in other fields. Aid agencies use development finance for loans to poorer countries. A search for development finance software can also return software for developers. This page covers property lending.

Development finance is not the same as a development exit loan. That loan comes after the build is done. It gives the developer time to sell the units without paying the higher cost of the build loan.

Questions lenders ask

What does development finance do?

It pays for a build or a large conversion that the borrower could not fund alone. The lender releases the loan in stages as the work is checked. The loan is repaid from sales of the finished units or from a refinance.

Can a developer get 100% development finance?

Rarely from one senior lender. Senior lenders cap the loan against cost and value, and most want the developer to put in some money. Some schemes reach close to all costs by adding a second lender or by giving extra security. That costs more.

What does a monitoring surveyor check?

They visit the site before each payment. They confirm how much work is done, whether it matches the plans and the cost plan, and how much money is needed to finish. The lender releases the next stage on their report.

How is development finance different from a bridging loan?

A bridging loan is short and usually funds a purchase or refinance in one payment. Development finance runs for the length of a build and pays out in stages. The lender watches costs and progress for the whole term.

LTGDV (loan to gross development value): The loan as a share of the finished scheme's value
Debenture: Security over a company's assets
Personal guarantee: An owner's promise to repay if the company cannot
Conditions precedent: What the borrower must deliver before the first draw

This page is general information for lenders. It is not legal, tax or credit advice.