£5.6m Development Exit Finance for 16 Apartments in Reading

The situation

The client was a Thames Valley developer reaching practical completion on 16 apartments a short walk from Reading station, a mix of one and two beds with an aggregate value of £8 million across the block, an average of £500,000 a unit into a market fed by the Elizabeth line and a buyer pool that treats Reading as the value end of the London commute. Sales had launched at first fix and two units were already under offer.

The problem was the calendar. The senior development facility had around £5.15 million outstanding and three months of term remaining, and a realistic sell-through on 16 units at this price point was twelve months or so, not three. The developer had two options: negotiate an extension with the development lender, or refinance onto a development exit facility built for exactly this stage of a scheme's life. He had also seen the next site he wanted, and every pound of equity trapped in the completed block was a pound he could not put toward it.

What we have seen is that developers hang on with the incumbent lender out of loyalty, or simple momentum, long past the point where the numbers stopped working. Expired development facilities get expensive quickly. The extension quote on the table carried a fee of around 1% of the facility plus stepped-up pricing, and facilities that limp past their extension drift toward default rates, which is where margins go to die.

Why extending the development facility was the wrong answer

Senior development money prices in the high single digits to around 10% annualised while it is doing its actual job, funding construction risk. At practical completion that risk is gone. The building is finished, certificated and selling, and paying construction-risk pricing plus an extension fee plus continued monitoring costs to hold completed stock is paying for a service the scheme no longer needs.

We ran the comparison for the client in plain numbers. The development exit facility priced just under 1% per month on a facility that shrinks with every sale, while staying put meant the extension fee spread across the expected sales period, a stepped-up rate on the full balance from day one of the extension, and the monitoring regime carrying on. Once all of it was laid side by side the monthly cost of staying with the incumbent came out meaningfully above the exit facility, a five-figure difference across the sales period on a facility this size, before counting the equity release the extension could never offer.

The incumbent was not doing anything wrong, to be fair. Development lenders are not priced or structured to hold completed stock, and the good ones will tell you so. The mistake is the developer who never asks the question.

The structure

The facility completed at £5.6 million against the £8 million aggregate value, 70%, repaying the senior development facility in full and releasing several hundred thousand pounds of equity on day one, which went straight into the exchange deposit on the developer's next site. Interest rolled up within the facility, so the sales period carried no monthly outgoing, and the arrangement fee sat in the standard 1% to 2% range.

Repayment ran in tranches as the units sold. The release pricing mechanism was the piece worth getting right: each completing sale repaid 110% of that unit's allocated share of the debt, so the balance fell ahead of pro rata and the lender's position strengthened with every completion, which is precisely why a 70% day-one advance was achievable on the block. By the halfway point of the sales programme the facility gearing had fallen into the fifties, and the developer kept the full surplus above release price on every sale.

The 12-month term matched the realistic sell-through rather than the optimistic one. Around a third of the development exits we arrange release equity for the next scheme at the same time as they cut the cost of holding the last one, and that dual purpose is usually what makes the case for moving rather than extending.

How it completed

Timing on a development exit is set by paperwork more than by the lender. My advice to any developer planning this refinance is to have the building control completion certificates, the new-build warranties and the EPCs sitting in the data room before the valuer visits, because a development exit lender lends against completed, certificated stock and every missing document stalls the valuation report. This client had the pack ready at practical completion, which is why the deal moved.

First enquiry to credit-approved terms took six working days. The valuation ran the following week, reporting both the aggregate of the 16 individual values and a block-value cross-check, with the lender advancing against the aggregate. Legals took three weeks, with the senior lender's redemption statement and the deed of release the only items on the critical path, and the facility completed a little over five weeks from first enquiry, comfortably inside the development facility's remaining term. No extension fee was ever paid.

Sales completed steadily through the term, each one triggering a tranche repayment at release pricing, and the facility redeemed in full with two months of term to spare.