£2.7m Development Exit Finance for a 15-Unit Block of Flats in Kent

The situation

The client was a Kent developer who had just reached practical completion on a purpose-built block of 15 flats, a mix of one and two beds, on the edge of Maidstone with fast access to the M20 and the mainline into London. Aggregate value across the block was £3.86 million, supported by a full RICS valuation with unit-by-unit figures. The senior development facility that funded the build was still in place, four sales were in solicitors' hands but none had completed, and the development lender's term had five months left to run.

The problem was the cost of standing still. The senior facility was priced for construction risk, and construction risk had ended the day the building control completion certificate was issued. Every month the developer stayed on development pricing while waiting for sales, the scheme's profit was being handed back to the lender in interest.

Holding senior development debt on a finished block is burning money. The lender priced for a building site, and the building site no longer exists.

Why refinance rather than just sell

The developer's first instinct was to push the sales through and avoid a refinance altogether, and around a third of the dev exit enquiries we take start exactly there. The arithmetic rarely supports it. Fifteen individual flat sales to owner-occupiers and investors realistically run twelve months from first completion to last, mortgage-dependent buyers fall over, and a five-month runway against that timetable meant either a fire sale to a block buyer at a discount that would have cost far more than a refinance, or an extension on development pricing at the lender's mercy.

What we have seen across the dev exit cases we arrange is that the developers who refinance at practical completion sell better, because they are no longer negotiating with a deadline behind them, and buyers' agents can smell a pressured seller from a long way off. The exit facility buys back control of the sales process.

The structure

We arranged a £2.7 million development exit facility at 70% of aggregate value, redeeming the senior development lender in full and returning a slice of equity to the developer at completion. The term was 12 months with interest rolled up, so the scheme carried no monthly servicing while units sold, and there were no early repayment charges, because the entire purpose of the facility is to be repaid early and a dev exit product that penalises redemption is working against its own client.

The mechanics that matter are the release provisions. Each unit was allocated a release price, set at a level where every sale repays slightly more than that unit's share of the facility, so the loan pays down faster than the security depletes and the LTV improves with every completion. The first three sales, the ones already in solicitors' hands at refinance, were structured as the first tranche of redemptions, and all three completed within nine weeks of the facility going live, taking the balance down by just over £600,000 before the marketing of the remaining units had properly restarted.

My advice to developers on release pricing is to negotiate it unit by unit before completion of the facility, not to accept a flat percentage across the block, because the one beds and two beds sell at different speeds and a flat release rate can leave the slowest stock carrying the most debt at the end of the term.

How it completed

Practical completion had been certified, which made this a clean case, and the work was in the detail rather than the credit. The valuer reported on both aggregate and individual unit values with sales evidence from two comparable Maidstone schemes. The new lender's solicitors coordinated the redemption of the senior facility with the registration of the new charge, the new-build warranty documentation was assembled for all 15 units, and the four sales already progressing were novated smoothly so the buyers' solicitors barely noticed the lender change beneath them.

First enquiry to completion took five weeks. The senior development lender was redeemed with three months to spare on its term, on good terms, which matters, because the developer will want that lender again on the next scheme.

The sales period

With the facility in place the developer remarketed the remaining eleven units at full asking prices rather than deal prices. Sales completed steadily through the term, each one triggering a tranche redemption at its release price, and the rolled-up interest burden fell month by month as the balance reduced. The developer used part of the equity released at refinance as the deposit on his next site, which is the pattern we see again and again: the dev exit facility is not really about the finished scheme at all, it is about freeing the developer to start the next one.