how property development finance works

What is property development finance?

Property development finance is a short-term, staged lending facility designed specifically for building. The key difference from other lending products is how the money is released. Rather than advancing the full amount upfront, development finance releases tranches of capital at set construction milestones, verified by an independent surveyor. This staged release reduces the lender's risk exposure and ties capital to actual progress on site.

FD Commercial arranges development finance from £250,000 for residential and commercial schemes across England, Scotland and Wales. We work with developers of all experience levels, from first-time builders to multi-scheme portfolios. Our broker fee on development finance is up to 1% of the loan amount, reflecting the complexity of arranging these facilities.

Development finance typically sits between a short-term bridging loan and a long-term mortgage. It is used to fund the construction phase until the scheme reaches practical completion or is refinanced onto long-term finance. The facility is always short-term, usually 12 to 24 months depending on the build programme.

The two key lending ratios: LTC and LTGDV

Every development finance facility is governed by two lending ratios that cap the lender's exposure. Understanding both is essential before approaching any lender, as both must be satisfied simultaneously.

Loan to Cost (LTC)

LTC is the percentage of total project costs the lender will fund. Total project costs include land or site acquisition, build costs, professional fees (architects, engineers, surveyors), contingency allowance (typically 5-10% of build cost), and any other scheme-related costs. Most lenders cap LTC at 85-90%, meaning you must fund 10-15% of total costs from equity or mezzanine finance.

Example: Your total project cost is £1,200,000 (land £350,000, build £820,000, contingency £30,000). At 85% LTC, the maximum facility available is £1,020,000. You must fund the remaining £180,000 from equity.

Loan to Gross Development Value (LTGDV)

LTGDV is the percentage of the completed development's anticipated value that the outstanding debt cannot exceed at any point during the build. This is the primary cap on the facility. Most lenders cap LTGDV at 65-70%, meaning if your scheme's gross development value is £1,800,000, the maximum outstanding debt cannot exceed £1,170,000 (at 65% LTGDV).

If LTC produces a higher facility than LTGDV allows, LTGDV governs and reduces your available facility. Both caps must be met simultaneously. The facility is ultimately sized to the lower of the two.

Example: GDV £1,800,000, total costs £1,200,000. At 85% LTC, facility cap £1,020,000. At 65% LTGDV, facility cap £1,170,000. LTC is the lower figure, so maximum facility £1,020,000.

The day 1 advance: acquiring the site

The development finance facility typically begins with a day 1 advance used to acquire the land or development site. This initial tranche funds the purchase price (or down payment), survey, legal fees, and any initial planning or design costs. The day 1 advance is calculated on the lower of the purchase price or the independent professional valuation.

Most lenders advance between 60-70% of the land value on day 1, meaning you fund the remainder from equity. If you are purchasing a site for £400,000 and the lender is willing to advance 65% of the valuation, your day 1 advance would be £260,000. You fund the remaining £140,000 from equity.

Some developers negotiate a reduced day 1 advance to improve the LTGDV headroom available later in the build. For example, advancing only 55% of land value provides additional borrowing capacity for construction drawdowns. This strategy improves flexibility if the build cost rises or if you wish to draw larger tranches later.

The day 1 advance is often released on day 1 completion (the acquisition completion date), provided the lender has received satisfactory search results, title information, and any required planning consents. No monitoring surveyor inspection is required for this advance.

Staged drawdowns: how the build facility works

After the day 1 land advance, the build facility is drawn down in stages tied to physical construction progress. The lender sets typical stage milestones based on the construction programme and building contract. Common stages include foundation completion and slab, structural walls and frame complete, roof on (watertight), first fix (electrics and plumbing rough-in), second fix and plastering, and practical completion.

At each stage, the developer submits a drawdown request to the lender. The lender then instructs the monitoring surveyor to visit the site and verify that construction has genuinely reached the claimed stage. The monitoring surveyor also inspects the quality of works, compares actual spending to the budget, and certifies that the remaining build budget is sufficient to complete the remaining works. This review typically takes 3-5 working days.

Once the monitoring surveyor certifies the stage as complete and satisfactory, the lender releases the next tranche directly to the developer or to the contractor (depending on the facility terms). The amount released is based on the certified value of works completed. Interest starts accruing on the drawn amount immediately, though no monthly repayments are required during the build.

Monitoring surveyor fees (typically £1,000 to £3,000 per site visit) are payable by the developer and must be budgeted as a project cost. These fees are in addition to any project engineer or clerk of works employed by the developer.

Interest: how it works and what it costs

Interest on development finance is rolled up throughout the facility. No monthly interest payments are required during the build phase. Instead, interest accrues on the amount actually drawn and is repaid when the facility matures or is refinanced. This means your interest bill depends on how much you have drawn at any given time, not on the total facility size.

Example: A £1,000,000 development finance facility draws as follows. Day 1: £260,000 advance. Month 2: £150,000 tranche. Month 4: £200,000 tranche. Month 6: £250,000 tranche. Interest accrues only on the amounts actually drawn at each stage. This staged approach significantly reduces total interest costs compared to a facility where the full amount is drawn on day 1.

Rates on development finance typically range from 0.75% to 1.5% per month (indicative), depending on several factors. LTC and LTGDV ratios directly influence pricing: lower ratios (safer for the lender) attract better rates. Borrower experience matters significantly. Experienced developers with two or more completed comparable schemes access the widest lender panel and most competitive pricing. First-time developers face higher rates and more limited options. Scheme type also influences rates. Residential development typically attracts tighter pricing than commercial or mixed-use schemes. Location affects underwriting: London and South East schemes are more competitive than regional markets. Exit strategy is critical. Sales-led exits (units selling off-plan) attract better rates than refinance exits.

In addition to monthly interest, costs include arrangement fee (1-2% of the facility), monitoring surveyor fees, independent valuation, and a broker fee of up to 1% on development finance cases. For a typical 12-month scheme, total finance costs run 8-15% of the loan amount. For example, on a £1,000,000 facility at 1.0% per month with £150,000 initial draw, arrangement fee 1.5% (£15,000), monitoring surveyor fees £8,000, and broker fee 1% (£10,000), total costs approach £150,000-£180,000. Build these into your development appraisal before committing.

The monitoring surveyor: who they are and what they do

The monitoring surveyor (sometimes called a project monitor or employer's agent) is appointed and paid for by the lender, but reports to both the lender and the borrower. They act as the lender's eyes on site throughout the build. Their primary role is to protect the lender's interest by ensuring the works are completed to the agreed specification, on budget, and on programme.

Specific responsibilities include reviewing and understanding the build contract and schedule of works before construction starts. They inspect the site at each drawdown stage to verify that construction has reached the claimed milestone. They compare the cost of works completed against the agreed budget and flag any significant variances. They confirm that the remaining contingency allowance is sufficient to complete the remaining works. They review progress against the construction programme and flag any delays. They assess build quality and ensure compliance with building regulations.

The monitoring surveyor's approval is required before every drawdown is released. If they raise concerns about build quality, costs, or contractor performance, the lender may withhold a tranche until those concerns are resolved. This creates a leverage point: if cost overruns emerge mid-build, the monitoring surveyor may certify a smaller tranche than requested, forcing the developer to address budget issues.

The developer pays the monitoring surveyor's fees, typically £1,000 to £3,000 per site visit depending on scheme size and complexity. Larger schemes may have monthly visits, whilst smaller projects may be inspected only at key milestones. These fees must be budgeted as part of total project costs and factored into the LTC calculation.

Gross development value (GDV) and how lenders assess it

GDV is the total anticipated sales revenue or investment value of the completed scheme. For residential schemes, GDV is the sum of the anticipated sale prices of all individual units on completion. For rental schemes (buy-to-let conversions), GDV is assessed on capitalised gross rental income at the projected yield. GDV is determined by an independent RICS-qualified valuer at the outset and reviewed again at practical completion.

Example: A 10-unit residential development where each unit is expected to sell for £180,000 has a GDV of £1,800,000. A commercial office building expected to generate £150,000 annual rental income at a 7% yield has a GDV of approximately £2,140,000 (£150,000 divided by 0.07).

Lenders scrutinise GDV assumptions carefully. Values must be grounded in comparable market evidence, not aspirational projections. The valuer will review recent sales of similar properties in the same location and assess the credibility of the developer's sale price assumptions. Conservative valuations are preferred. A scheme valued at £1,800,000 with strong comparable evidence is more fundable than one valued at £2,200,000 based on optimistic assumptions.

GDV is reviewed again at practical completion to confirm that market conditions have not shifted materially. If the market has softened and GDV has fallen below the LTGDV cap, the lender may demand earlier repayment or refinancing. Conversely, if GDV has risen, this improves headroom and refinancing options.

Exit strategies

The exit strategy is as important to the lender as the scheme itself. Development finance is always a temporary facility. Lenders need to understand how the developer plans to repay the facility and extract themselves from the transaction. There are four primary exit routes.

Sale of completed units

Individual unit sales occur when residential units are sold off-plan or on practical completion. The developer receives cash from each sale and uses it to reduce the facility balance. This is the most common residential exit. Land sales occur when planning permission has been granted and the land is sold with planning to another developer. Bulk sales occur when all units are sold to a single purchaser or investor (e.g., a housing association or institutional investor) on completion.

Development exit finance

When the build facility matures (e.g., at 18 months) but sales are progressing slower than expected, a development exit loan can replace the original development facility. Development exit loans carry lower rates than development finance (typically 0.65-0.95% per month indicative) because construction risk has been completed. Units are completed and lettable or saleable. Exit loans buy time for the developer to complete sales or arrange long-term refinancing. They are typically available for 6-18 months additional term.

Refinance to buy-to-let

Residential units retained as investment are refinanced onto buy-to-let mortgages on practical completion. The BTL mortgage pays off the development facility. This exit works well for multi-unit schemes where the developer intends to retain some units and sell others. It requires positive rental income: the lender will assess income against the mortgage on a stressed rental basis.

Refinance to commercial mortgage

Commercial schemes (offices, industrial, retail) are typically refinanced onto commercial mortgages once the scheme is complete and income is established. A 6-12 month operational period is usually required to demonstrate stable rental income before commercial mortgage lenders will commit. The development facility is held until this period is complete, then refinanced into a long-term commercial mortgage.

The exit strategy directly influences pricing and lender appetite. Sales-led exits (units selling off-plan with evidence of buyer interest) attract tighter pricing. Refinance exits depend on the strength of the exit lender's appetite at the time of completion. Conservative exit assumptions (lower sale prices, longer sales period) are preferred by underwriters.

First-time developers vs experienced developers

Lender appetite for development finance varies significantly based on developer track record. Experienced developers with at least two comparable completed schemes access the widest lender panel and most competitive pricing. These developers have proven execution capability, demonstrated cash management, and a portfolio of completed projects for lenders to assess.

First-time developers face more limited lender options. They typically encounter higher rates (often 0.25-0.5% per month higher than experienced developers), lower LTC and LTGDV caps (LTC capped at 80-85% instead of 85-90%, LTGDV capped at 60-65% instead of 65-70%), and more frequent monitoring surveyor visits. Lenders want to manage risk by limiting exposure and maintaining closer oversight during the construction phase.

First-time developers can access development finance, but success depends on correct lender selection and a realistic scheme appraisal. Key factors lenders assess include relevant professional experience (construction background, property experience, or professional involvement in the scheme), strength of the project (lower-risk schemes, strong end-buyer interest, proven comparable precedent), and strength of the exit strategy (off-plan sales with confirmed buyers, or strong rental profile for refinance). See our first-time developer finance guide for detailed guidance on strengthening an application and approaching the right lender panel.

Process steps

Frequently asked questions