Development Finance Guide

Development finance lenders assess a project using several key metrics. The total cost includes land purchase, construction/development costs, professional fees, and finance costs. The day-one value is the value of the site at the point of funding (which may be the purchase price or a professional valuation). Loan-to-cost (LTC) expresses the loan as a percentage of total project costs. Loan-to-gross-development-value (LTGDV) expresses the total loan as a percentage of the projected value of the completed scheme. Lenders typically set maximum LTC and LTGDV limits — actual limits vary by lender, project, borrower experience and market conditions.

Development finance is typically drawn down in tranches linked to construction milestones (e.g., groundworks, superstructure, first fix, second fix, completion). Before each drawdown, a monitoring surveyor — instructed by the lender — inspects the site and reports on progress, quality, and budget. The lender releases funds based on the surveyor's report. This staged approach protects both lender and borrower but means funds are not all available on day one. You need to manage cashflow carefully between drawdowns.

Interest is typically charged on drawn balances only (not the full facility) and may be rolled up (added to the loan) or serviced monthly. Fees can include arrangement fees, monitoring surveyor fees, valuation fees, legal fees, and broker fees. Lenders typically require a contingency budget (commonly 5-10% of build costs, though this varies) to cover cost overruns. Actual interest rates, fees and contingency requirements vary by lender and project.

Lenders will want to see appropriate planning consent (or evidence it will be granted) before funding. Borrower experience is a key factor — lenders prefer developers with a track record of similar projects. A credible exit strategy is essential: how the loan will be repaid, typically through sale of the completed units or refinance onto a term product. The exit must be realistic and supported by evidence (e.g., sales valuations or refinance appetite).

Security typically includes a first legal charge over the development site, and may include additional charges or debentures. Personal guarantees from the developer(s) are commonly required — these can expose personal assets and may lead to bankruptcy if enforced. Development finance carries significant risks: cost overruns, delays, planning issues, market downturns, and contractor failure can all jeopardise a project. If the project fails and the loan cannot be repaid, the lender may enforce security and personal guarantees. Borrowers should fully understand these risks and seek appropriate professional advice.

General commercial development finance is typically not regulated by the FCA. However, where the development involves residential property intended for owner-occupation by individuals, or where the borrower is an individual (rather than a corporate entity), consumer regulation may apply in certain circumstances. The classification depends on specific facts. If you are unsure, seek advice from a qualified professional. FinanceMyCompany.co.uk is a credit broker, not a lender.