Development finance: how deals are really structured

Development finance is not primarily about the land value or the build cost in isolation. Lenders fund schemes based on risk layering. 

Lenders will assess whether you, as the developer, have enough capital in the deal, enough experience to deliver, and whether the site itself provides a realistic route to exit. The strongest applications are robust on all three counts. 

The big three: what lenders care about most

There are three fundamentals a development finance lender will assess, when underwriting your application:

Money

This is about what proportion of the costs are funded by you versus the lender, and whether there is sufficient contingency (spare cash in case of additional costs) and liquidity (how easily you can access the funds you are putting forward or are holding as contingency).

Experience

Lenders want to know the build will be delivered on time, on budget and to a saleable standard. This is where your experience, or the experience of your contractors (and potentially both) comes to the fore.  

Professional developers can present evidence of previous projects they have completed by way of a CV (Curriculum Vitae), much like you would present your experience if you were applying for a job. If you are taking on your first development project and cannot demonstrate your own experience, then the professional team you have arranged to work with will need to demonstrate their experience with a summary of projects they have completed.

Site strength

Even a strong property developer struggles with a weak site. Lenders focus on:

• Location:Is there proven demand for the intended property type in the area, or is the project speculative?
• Planning permission status: Has full planning permission been granted, or is the project only passed the outline planning permission stage? If full planning has not been granted, but you are confident it will, then you could get a bridging loan to help fund buying the land and then refinance to a development loan once it is granted. However, that adds an extra layer of complexity and cost. To secure development finance a lender will want planning permission in place because until it is, there is always the chance it will not be granted.
• Type of premises: Are the units you are building suited to buyer/tenant demand, is it a mix of property types or just one, do you have the right balance if it is a mix?
• Market depth:Is the demand great enough to match the volume of units you are building without leaving you empty units or unsellable?
• Margin: Does your project carry a wide margin between your costs and expected profit to comfortably absorb an increase in costs or a softening in property values?

If any of these factors are weak, the others need to be stronger to compensate. A good property developer will always mitigate risk as far as possible and structure a project for a strong profit margin.

How much can be borrowed on day one?

Day-one funding normally covers the land purchase and acquisition costs (e.g. stamp duty, legal fees, valuation fees, broker fees). 

Typical leverage ranges from 60% to 70% of land value, though experienced developers with strong margins may achieve up to 75%. Without planning permission being in place, the loan to value for any borrowing to buy the land is capped at 50%.

Interest is typically rolled up and funded within the facility, but lenders still expect you to contribute sufficient equity to maintain risk balance.

Loan to Cost (LTC) and developer contribution

Loan to Cost is one of the most important metrics in development finance. Typical ranges are broad; from 60% - 95% LTC, regardless of property development experience. This means you will usually need to contribute 5%–40% of the total project cost.

The total project cost includes:

• Land purchase
• Construction costs
• Professional fees
• Finance costs
• Marketing and sales costs
• Contingency

Normally your LTC is front-loaded, which means that the deposit you put into the land will cover the equity required for the loan. However, if this is not enough to cover the equity required, you will be expected to fund part of the development (although this is rare).

If the loan to cost is too high, most lenders will reduce the amount you receive on day one, requiring higher upfront capital from you.

What costs must be budgeted for, beyond the build?

Developers often underestimate the non-construction costs that lenders insist are included in appraisals.

Professional fees

• Solicitor
• Architect and planning consultant
• Structural engineer
• Project manager
• Building control
• New build warranty

Commercial costs

• Estate agent sales fees
• Land agent or acquisition consultant
• Marketing costs
• Show home and staging

Statutory costs

• Planning contributions and Section 106 where applicable
• Community Infrastructure Levy (CIL)
• Utilities connections

Tax and acquisition costs

• Stamp Duty Land Tax
• Legal fees
• Searches and title insurance

Other

• Inflation shocks

These costs can represent 10–15% of the total project value and materially affect margins and Loan to Cost (LTC) calculations.

Why contractor strength matters more than build cost

For lenders, the contractor is often the single biggest risk control in a project. An experienced contractor with a proven delivery history can materially improve funding terms, while a cheap but unknown contractor often raises red flags.

Whilst fixed-price contracts may be strongly preferred, because they reduce cost-overrun risk, they are rarely offered by contractors. Most lenders favour recognised forms such as those produced by the Joint Contracts Tribunal (JCT). The JCT is the body that produces the standard contract forms most commonly used for construction projects in the UK.

Projects using informal or non-standard contracts may still be funded, but lenders often increase contingency requirements or reduce leverage to offset the risk.

Monitoring surveyors and quantity surveyors

Every development facility involves independent monitoring.

The monitoring surveyor, typically chartered through the Royal Institution of Chartered Surveyors (RICS), performs several functions:

1. Validates the build cost
2. Reviews procurement strategy
3. Approves drawdowns in stages
4. Monitors progress and variations
5. Confirms practical completion

Developers should budget monitoring fees from the outset. These are usually charged at initial review plus staged inspection costs.

Engaging a separate quantity surveyor is also valuable, particularly on larger projects, as they help control variations and protect margin.

Budgeting properly: contingency and margin discipline

Most lenders require contingency of at least 5% of build cost. For inexperienced developers or complex sites, this may increase to 7.5–10%.

Contingency is not optional padding. It protects both developer and lender against:

• Ground condition surprises
• Material price movements
• Programme delays
• Design amendments
• Inflation shocks

Equally important is gross development margin. Lenders typically look for:

• Minimum 18–20% on cost for experienced developers
• 20–25% on cost for less experienced developers
• Higher margins for riskier markets or unit types
• If the margin is thin, leverage usually reduces.

How lenders judge site strength

Location still drives exit risk. Lenders examine:

• Local sales evidence
• Depth of buyer pool
• Transport links and employment drivers
• Comparable unit pricing
• Competition pipeline

They also assess the planning consent itself.

Projects with well-designed, market-appropriate unit mixes perform better than those designed purely for density or GDV, but there are exceptions.

Even experienced developers struggle to secure funding for projects with weak exits or over-optimistic values.

Putting it all together

A fundable scheme usually shows:

• You have meaningful equity invested
• The contractor and team reduce delivery risk
• The site has a realistic, evidence-based exit
• The appraisal includes all costs and sufficient contingency
• The margin provides a buffer if things slip

When these elements align, lenders compete and the interest rate you are offered may drop. When they do not, even technically profitable projects can struggle to secure funding.

To discuss an application for development finance, call on the Freephone number above, or enquire online for a call-back.