Development Finance Explained: What It's Used For and How It Generally Works

ASF

Oct 14

7 min read

Updated: Oct 15

Development finance may provide structured funding for land acquisition, construction, conversion and refurbishment projects undertaken for investment or business purposes.

It is generally used where a project requires finance during the development period, with repayment usually linked to a planned sale, refinance or another defined exit.

1. WHAT IS DEVELOPMENT FINANCE?

Development finance is a form of short- to medium-term secured business finance that may be used to fund property development projects.

A development facility can potentially support:

Land acquisition.
Construction costs.
Conversion works.
Refurbishment expenditure.
Professional fees.
Planning and development-related costs.
Other eligible project expenses, depending on the case.

Property development loans are usually assessed against the complete project rather than the property alone. The assessment may consider the site, planning position, build costs, projected end value, borrower experience and proposed exit strategy.

The structure can vary considerably. Funding may be released in stages as works progress, while interest and fees may be calculated according to the facility structure and amount drawn.

Development finance is generally intended for investment and business purposes. It is not designed for residential owner-occupier requirements.

2. WHO TYPICALLY USES IT

Development finance may be considered by a range of property professionals and investment businesses, including:

Experienced property developers.
Investors undertaking a first structured development project.
Portfolio landlords adding or repositioning investment property.
Property companies and UK Ltd structures.
Special purpose vehicles, commonly known as SPVs.
Joint ventures and investment partnerships.
Businesses developing commercial or mixed-use property.

A lender may consider the applicant’s relevant property and development experience. This may include completed projects, previous refurbishment work, construction knowledge and experience managing contractors or professional teams.

The source of wealth may also form part of the assessment. The reason for investing, the background of the funds and the intended ownership structure may need to be explained clearly.

A UK Ltd or SPV structure may be suitable for some investment projects. The treatment of the company, its directors, shareholders and any connected parties can depend on the project and the lender’s criteria.

3. TYPICAL DEVELOPMENT SCENARIOS

Residential property extension and building works with scaffolding

Development finance may be used across several types of project.

Ground-up construction

A facility may support the purchase of a development site and the construction of new units. The project may involve residential, commercial or mixed-use property, depending on the intended investment and the available planning consent.

Conversion projects

A property may be converted into separate units or adapted for a different commercial use. The proposed works, planning position and expected end value may influence the available structure.

Refurbishment-to-sale

Some investors may acquire an existing property, complete substantial works and sell the completed asset. The finance may cover eligible acquisition and refurbishment costs.

Refurbishment-to-refinance

A developer or landlord may intend to retain the completed property as an investment. In that case, the proposed exit may involve refinancing after the works are complete and the property is ready for its intended use.

Phased schemes

Larger developments may be completed in stages. Funding may therefore need to reflect a monitored build programme, phased construction costs and the timing of sales or refinancing.

4. HOW A DEVELOPMENT FINANCE CASE STARTS

A development finance case usually begins with a clear summary of the project.

The information may include:

The property or site.
Purchase price or current ownership position.
Planning consent and conditions.
Build or refurbishment specification.
Total project costs.
Expected programme and completion date.
Projected gross development value.
Proposed sale or refinance exit.
Borrower contribution.
Relevant development experience.
Source of wealth and investment rationale.
Proposed UK Ltd or SPV structure.

The quality of the initial information can affect how efficiently the case is reviewed. A complete cost plan, realistic programme and documented exit strategy may help provide a clearer basis for assessment.

Complex projects may require additional information from valuers, quantity surveyors, architects, planning consultants or contractors.

5. LAND AND PROPERTY SECURITY

Development finance is generally secured against land or property. The security position may include the development site and, depending on the circumstances, additional property or guarantees.

The site may be assessed for:

Current value.
Purchase price.
Planning position.
Location and access.
Existing use.
Proposed use.
Buildability.
End value.
Marketability on completion.

The structure may also consider how much of the project cost is being funded and the relationship between the loan, total costs and projected end value.

Security does not remove the risks associated with borrowing*. A development may encounter delays, cost increases, planning complications or changes in market conditions. These factors may affect the project’s completion and exit.

*borrowing secured against property carries a risk of losing the property if the borrower fails to meet the facility’s repayment obligations and the lender repossesses the security property. The borrower may also remain liable for any shortfall where the proceeds of sale are insufficient to repay the outstanding debt and other amounts due.

6. THE IMPORTANCE OF THE EXIT STRATEGY

The exit strategy explains how the development finance may be repaid.

Common exits may include:

Sale of completed units.
Sale of the entire development.
Refinance onto longer-term investment finance.
Refinance following stabilisation of rental income.
Sale or refinance of another property.
A combination of sale and refinance.

The proposed exit should generally reflect the project’s intended use. A scheme intended for sale may require a different plan from one intended to be retained as a rental investment.

Expected rental income, property management through letting agents and the intended ownership structure may be relevant where the completed property is to be retained.

The exit may also need to account for the expected completion date, marketing period, valuation assumptions and any refinancing requirements. A clear plan may help identify the funding structure required from the outset.

A planned sale or refinance is not a guaranteed repayment outcome. Property values, sale timings, rental criteria may change. Refinancing may not be available on the expected terms, or at all, when required.

7. COST, INTEREST AND DRAWDOWN STRUCTURE

The cost of development finance may depend on the project, borrower, security, experience, planning position, loan size and proposed exit.

Costs may include:

Arrangement or facility fees.
Valuation fees.
Legal costs.
Monitoring or quantity surveyor fees.
Administration costs.
Interest on drawn funds.
Exit-related costs, depending on the structure.

Some facilities may calculate interest only on the amount drawn. Other structures may allow interest to be retained or rolled up, depending on the terms agreed.

The drawdown schedule may follow the build programme. An initial amount may be released at completion, followed by further staged drawdowns after progress has been inspected and confirmed.

Where interest is rolled up, it will generally be added to the amount due for repayment in accordance with the facility terms. The outstanding balance may therefore increase during the terms. All costs should be reviewed carefully before proceeding. The total cost of finance may affect the viability of the project and the amount required from the borrower.

8. HOW THE PROCESS GENERALLY WORKS

A development finance process may typically involve the following stages:

The process can vary by project. Early preparation may help identify missing information and clarify the practical funding requirements.

9. THE ROLE OF A SPECIALIST FINANCE BROKER

A specialist finance broker may help organise a complex development finance case and present the relevant information in a clear format.

This may include:

Understanding the investment objective.
Reviewing the proposed structure.
Identifying project complexities.
Assessing the likely information requirements.
Exploring suitable property development loan structures.
Coordinating with valuers, solicitors and other professionals.
Helping manage communication during the application process.

At Andromeda Specialist Finance, the focus is on understanding the property, borrower and funding requirement before structuring the transaction.

The team’s stated process is:

Enquire.
Assess and structure.
Execute.
Fund and complete.

You can review the company’s Development Finance service or get in touch to outline a project for initial consideration.

10. TERMS DIFFER BETWEEN LENDERS

Development finance terms can differ significantly between lenders and projects.

Differences may arise from:

The type and scale of development.
Planning status.
Location and property type.
Borrower experience.
Source of wealth.
Investment rationale.
UK Ltd or SPV structure.
Loan size and project costs.
Borrower contribution.
Expected rental income.
Contractor and professional team.
Proposed sale or refinance exit.
Security available.

A structure suitable for one project may not be suitable for another. The assessment is generally specific to the property, borrower and intended use of funds.

For this reason, development finance should be approached with a complete project plan and a realistic understanding of the risks, costs and time involved.

PLAN THE NEXT STEP CAREFULLY

Before discussing development finance, consider whether you have:

A clear investment or business objective.
A complete project cost plan.
Relevant property or development experience.
A documented source of wealth.
A clear reason for investing.
Suitable planning information.
A realistic build programme.
A defined sale or refinance exit.
A suitable UK Ltd or SPV structure, where required.
Provision for delays, additional costs and changes to the project.

Development finance can involve detailed assessment and several professional parties. A specialist broker may help you organise the requirement, understand the information needed and structure the next stage clearly.

Contact Andromeda Specialist Finance to speak with a member of the team about a development finance enquiry. The team will review the initial information and explain the next steps.

RISK WARNING

YOUR PROPERTY MAY BE REPOSSESSED OR A RECEIVER APPOINTED IF YOU DO NOT KEEP UP REPAYMENTS ON ANY DEBT SECURED AGAINST IT. BORROWING CARRIES RISKS. MISSING PAYMENTS CAN LEAD TO SERIOUS CONSEQUENCES, INCLUDING ADDITIONAL COSTS AND THE LOSS OF ANY SECURED ASSET. FOR FREE, IMPARTIAL GUIDANCE, VISIT MONEYHELPER.ORG.UK.

DISCLAIMER

This article is general information about development finance for investment and business purposes. It is not advice or a recommendation and does not constitute an offer of finance. Any lending is subject to status, lender criteria and a full assessment. Development finance of this kind is generally not regulated by the Financial Conduct Authority. Development secured on a property that is, or will be, the borrower's home is regulated and is not something we arrange.

Andromeda Specialist Finance Ltd is an appointed representative of Commercial Finance Brokers UK Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 736199) for the purpose of consumer credit business. Commercial Finance Brokers UK Limited is registered in England & Wales, company registration number 06353973. Andromeda Specialist Finance Ltd is a broker, not a lender. We work with a range of specialist lenders in this market and may earn a commission from lenders, which varies between lenders.