An A-Z of development finance

Development finance has a suite of lending product types designed for a variety of different projects. Those might include large-scale conversion projects of an existing building plus the renovation and splitting of a residential building into separate units. Another might be the conversion of other property types such as commercial buildings being turned into residential buildings. Permitted development right changes have also led to more traditional building of property from the ground up.

The financing

Development finance enables the developer projects to fund up to 100 per cent of cost.

The most common development finance product is senior finance development lending, which is when a lender looks to assist the developer with funding up to 85 per cent of the total project cost subject to no more than 65 per cent of Gross Development Value (GDV). This includes the cost for the purchase of the land added to the combined build costs for the scheme.

For this level of lending the lender will take a first legal charge over the development itself, which is not to be confused with the lender taking a profit share which they do not take on this type of funding. This type of finance also has a slight variant, which many lenders call ‘stretched senior finance’. Such lenders will allow the finance product to stretch a bit further to 90 per cent of total cost subject to this being no more than 70 per cent of GDV.

If a developer is looking at making its own cash input into a project (lower than just using the senior finance funding), they utilise another product in the development finance suite, which is mezzanine finance. Mezzanine finance is a top up of funding that sits behind the first legal charge of the senior lender. The funder usually holds a second legal charge on the development site. A legal document named the ‘deed of priority’ is arranged, outlining the first and second charge order. The benefit is this allows a developer to top up to 90 per cent of total cost without the use of a stretched senior lender.

The final type of finance that a developer can use to get them up to 100 per cent of their project’s costs is equity finance. Some development projects therefore have three lenders. This type of lending and the cost of which is renowned for taking large profits splits from the developer. This is not always the case, although most equity lenders can sometimes take up to 50 per cent of the developer’s profits once the senior and mezzanine finance costs are repaid. There can be flexibility with funders allowing a higher interest rate being offered and the developer still retaining all profits once the total finance costs are deducted.

To summarise, there are numerous types of funding available for developers when looking to finance a project. All schemes are reviewed on a deal-by-deal basis. We work with the developer to help them structure the most cost efficient and suitable solution.