For developers, landowners and investors
Development Finance Explained: How a Property Scheme Gets Funded
Sviatoslav JerdetchiiCEO & Founder of Craftex. Updated , 6 min read
The short answer
Property development finance is a short-term loan for building a scheme, released in monthly stages as work is done and repaid from the sale or refinance of the finished building.
- It sits on top of the developer's own equity, and sometimes a second, dearer layer of debt.
- Lenders size the loan against total cost and against the finished value, and lend the lower.
- A monitoring surveyor checks the work each month before money is released.
- The contractor, the fixed price and the programme decide whether a lender says yes.
Property development finance pays for building a scheme that does not exist yet. A lender releases the money in stages as the work is done. It is repaid from the sale or refinance of the finished building.
That is why it is not a mortgage. A mortgage lends against a building that exists. A development loan lends against a promise, so the lender cares who will build it, for how much and how fast. Want build costs a lender will trust? Book a site visit and we will price your scheme.
This guide is general information, not financial advice. Rates, fees and limits change with the market and each lender, so we explain how the pieces work rather than quote them.
The property development finance capital stack
Every scheme is paid for by a stack of money. The layers are repaid in order, and the riskier the layer, the more it costs.
| Layer | Who provides it | Repaid | Cost to the developer |
|---|---|---|---|
| Senior debt | Banks, specialist lenders, debt funds | First | Lowest |
| Stretch senior | Specialist lenders | First, as one larger loan | Higher than senior |
| Mezzanine | Specialist lenders, private capital | After senior debt | Higher |
| Preferred equity | Investors | After all debt | High, often with a profit share |
| Equity | The developer and partners | Last | Shares the profit |
The total cost of a scheme covers land, build and professional fees. It also covers council charges such as the Community Infrastructure Levy, the finance itself, sales costs and a contingency.
The main types of finance
Most schemes use two or three of these together.
- Senior development loan. The core loan, secured with a first charge over the site. It covers part of the land and most of the build.
- Stretch senior. One larger senior loan that reaches higher up the stack. Simpler than two lenders, but dearer.
- Mezzanine finance. A second loan behind the senior lender. The senior lender must agree, and both sign an agreement on who gets paid first.
- Equity. The developer's own money, or a partner's. It goes in first and comes out last.
- Bridging loan. Short-term money to buy a site quickly, often before planning. It is usually refinanced once consent arrives.
- Development exit finance. A loan near completion that repays the build loan, buying time to sell or let.
Equity is what makes a lender comfortable. It shows the developer has something to lose. Our guide to joint venture agreement key terms covers how equity partners share profit and control.
Loan to cost and loan to GDV: how the loan is sized
Lenders test the loan two ways. Loan to cost compares it with the total cost of the scheme. Loan to GDV compares it with the finished value. The lower answer wins.
The figures below are made up to show the logic. They are index units, and the limits are hypothetical, not market rates.
| Test | Scheme figure | Hypothetical limit | Maximum loan |
|---|---|---|---|
| Loan to cost | Total cost 80 | 70% | 56 |
| Loan to GDV | GDV 100 | 60% | 60 |
| Loan offered | Lower of the two | 56 |
The gap between the loan and the total cost is the equity the developer must find. If the appraisal is weak, both tests shrink. Our guide to GDV and residual land value shows how each appraisal line is built.
We hired Craftex for a commercial ground floor fit-out with 2 flats above. There were some minor co-ordination hiccups with third-party suppliers but the team kept it moving. Finish quality was strong. Kitchens and doors look great. I have already asked them for a quote on the next project.
How the money is released
A development loan is not paid out in one sum. This is the usual pattern.
- Day one. The developer's equity normally goes in first. The lender may fund part of the land price at purchase.
- Monthly drawdowns. The contractor values the work done. The lender's monitoring surveyor checks it on site and recommends a drawdown.
- Rolled-up interest. On many loans, interest is added to the debt and paid at the end, because the scheme earns nothing until it is finished.
- Repayment. On sale or refinance, the senior lender is repaid first, then any mezzanine, then the equity.
Money arrives in arrears against work done. So the contractor's valuations and the monitoring surveyor's sign-off keep the scheme moving. Our guide to the development monitoring surveyor explains that role.
What a lender checks before saying yes
A lender reads the scheme the way a monitoring surveyor does. These are the questions it asks.
- The appraisal. Is GDV backed by comparable sales? Are costs realistic?
- Planning. Is consent granted, and are Section 106 and levy costs in the numbers?
- Experience. Has the borrower, or its team, delivered similar schemes?
- The contractor. Track record, financial standing, insurance and the contract it will sign.
- The build contract. A fixed-price design and build contract with clear scope gives the most cost certainty.
- The programme. Realistic, with time for approvals, utilities and the unexpected.
- The contingency. Enough for the site, especially on refurbishment and conversion work.
- The exit. Who will buy or rent the finished scheme, and on what evidence.
Long lists of provisional sums and exclusions do the opposite of a fixed price. They tell the lender the cost is still unknown.
What the contractor has to provide
Lenders lend against the build, so they look hard at the builder. A contractor on a funded scheme should expect to provide these.
- A priced contract with a clear scope, programme and payment schedule.
- Monthly valuations the monitoring surveyor can check line by line.
- Insurance certificates: public liability, employer's liability and contract works cover.
- Collateral warranties or third-party rights, so the lender can rely on the contractor.
- Step-in rights, so the lender can keep the contract going if the borrower defaults.
- Regular reports on progress, risks and changes.
Craftex holds public liability and employer's liability insurance of £10,000,000 each. Our construction project management team reports cost and programme in a form funders can follow.
Regulated or unregulated finance
Most development loans go to companies for schemes that will be sold or let. These usually sit outside the Financial Conduct Authority's mortgage rules.
It changes when a loan goes to an individual or trustees. If at least 40% of the land is used as a home by the borrower or a related person, it can be a regulated mortgage. That brings different protections. If the scheme includes a family home, take advice first.
Building safety and the programme
Taller residential schemes add gates a lender will check. A higher-risk building is at least 18 metres or seven storeys, with at least two homes.
For these, the Building Safety Regulator must approve building control before work starts. A completion certificate is then needed before people can live there. Both take time, so both belong in the programme and the interest budget.
Common reasons funding falls over
Most of these are avoidable with proper work before the application.
If someone offers you a share in a development with a guaranteed return, read our guide to property development investment scams in the UK first.
- The values do not survive the lender's own valuation.
- The build price is not fixed, or the contractor cannot show its track record.
- Pre-start planning conditions are not cleared.
- The developer cannot fund its equity on day one.
- The programme has no room for approvals, utilities or the unexpected.
Cost, programme and design worked out first is the job of a feasibility study. See our development feasibility and site appraisal service.
Where Craftex fits
On a funded scheme, the lender needs a firm build price and clean monthly reporting. Construction is our own in-house department, so we price the build ourselves and report against it every month.
On schemes we run as development manager, we also prepare the developer's side of the lender's information. We take development schemes from £3M to £150M GDV, and construction from £100,000.
Getting ready for a funding application? Book a site visit and send us the drawings.
