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  • Writer's pictureAdewole Ademolake

Property Development Finance

We hear news of developers delivering projects worth billions of pounds, and If you have a wild imagination like me you probably thought who in the world can afford to build such a development with their own money?

When I was younger and didn't understand debt/ lending principles, I thought everyone bought their homes with cash. Little did I know that a large proportion of home buyers and developers in the UK used debt to purchase or developer their homes.

As I grew up, I started to understand what a mortgage was; I then learned that developments are funded using debt finance.

With a little, you can control much, which is the basic meaning of leverage. The principle of leverage was excellently summarised by the Famous Greek mathematician Archimedes which says "Give me a lever long enough and a fulcrum to place it, and I shall move the world."

From a property/ development perspective, the lever is your deposit and world is the massive development you dream of building one day or home you wanted to purchase.

What is Development finance?

Development finance is a loan granted for development or refurbishment of residential, mixed-use or commercial properties.

Types of finance in the public and private sector

In Council's, finance is generally secured via the Public Works Loan Board ("PWLB") which is exclusively available to local bodies. The current rate as of 25 January 2021 is 1.92% which is phenomenal. Councils can use right to buy receipts to input into affordable housing development schemes and are also able to benefit from grant funding. The grants and the relatively low-interest rates from the PWLB have stimulated public sector housing development in recent times.

Whereas, the private sector has to utilise many forms of financing to bring forward their schemes. The larger house builder may benefit from the using committed revolving credit facilities, which is a "glorified" corporate overdraft that can be used for property development. The private sector may also use pensions funds, joint venture finance or equity to fund their schemes.

Small to medium-sized developers use a mixture of equity and debt finance to finance their schemes.

Let's start with what makes up development finance

If you have ever taken out a loan, overdraft or mortgage, you should understand development finance basics. A typical residential mortgage is paid back within 25 years, but development finance is expected to be paid in full between 12-24 months depending on your project's term.

The below shows the critical areas of development finance:

The loan is the amount you need to borrow to deliver your project. It could be used to purchase land, pay for construction costs/development fees or both.

  • Equity: this is the money you put into a project from your pocket. Planning gain is also considered to be "skin in the game" for the small developer.

  • Personal guarantees: this is the area that separates the dreamers from the doers. Most lenders will levy a 10-20% guarantee to keep you motivated. It effectively means that everyone has something to lose, including you. The lender will require you to submit an asset and liability schedule.

  • Loan to cost ("LTC" ): Loan / Costs- typically, lenders will expect this to be at 75%/ 80% (varies depending on the lender)

  • Loan to Gross Development Value ("LTGDV" ): Loan/ GDV- lenders will expect this to be on or around 60% / 65%.

  • Arrangement fees: borrowers are expected to pay this fee typically 1% of the loan in question.

  • Exit fees: borrowers are expected to pay this fee which is typically 1% of the loan in question

  • Legal fees: the person or entity borrowing will be expected to pay the lenders legal fees.

  • Surveyors fees: as a developer, you will be responsible for paying the development motors (Quantity surveyor's) fees on behalf of the lender. The monitor will determine when you can receive funds for your development.

The moral of the story is that you have to factor in all of the above, together with your professional fees, legal costs, interest costs, and make a profit at the same time. Missing out any of the above could prove fatal to making your development scheme viable. Put all of this into your appraisal to ensure there are no negative surprises, only positive surprises like increasing property values.

Worked example

In this example, I have modelled a dream mansion for my daughter called Tia's residence, which has a sales value of £3,000,000. The build is likely to take 12 months.

Having spoken to friends and contacts who work in development finance, they have said that the smaller developers need to focus on maintaining a reasonable profit of at least 17% of Gross Development Value and ensure they make provision for interest and the associated fees.

The LTC that most are looking for is on or around 75%, which means you will have a 25% equity. In this example, the equity put in was £638k. The LTGDV ratio must be lower than the LTC; otherwise, you won't make any money on the project.

In this example, the total cost of finance is £158k for lending £1.8m which works out to be just over 9% in interest and fees. Not making the appropriate assumptions on lending fees can reduce your profit.

Another critical point to note is that the profit anticipated on a development utilising development finance should not be less than 17% of the gross development value.


When looking at the above deal's equity, I am sure you will think this is eye-watering at £638k, but you should note that planning gain is seen as equity for some lenders. Planning gain is the difference in the price you agree to purchase the land from the landowner and the uplift in value once planning permission is secured. In the above-worked example, let's say you agreed on an option agreement to purchase the land for say £450k, and now that you secured planning, the land was valued at £700k, this will mean that the difference of £250k is your planning gain. You will then need to find the additional £388k through investors, or if you've got the money, you can bankroll the balance.

What happens if things go completely wrong

If things go wrong, you have to brace yourself and be prepared for some challenges. The lender has the first charge over your development and will firstly seek to work with the developer to resolve the issue. The types of issues experienced by developers are delays, having no contingency or final valuations of the home(s) coming in lower than forecasted.

If the matter cannot be resolved, the lender will enforce the personal guarantee via the courts, which will compel the developer to resolve the issues and complete the development (if possible). Failing this, the lender will take ownership of your development.

Once ownership is secured, the lender will then seek to sell it to recoup their costs. The shortfall between the site's sold price and the loan will have to be covered by you. If the site cannot be sold and you do not have any money, then this is likely when you will have to face your biggest life challenge and may need to sell some of your personal assets to meet this shortfall. If you cannot make the shortfall, then you may have to file for bankruptcy, which will inhibit your ability to borrow in the future.


When wanting to embark on your journey towards property development, make sure you include the right lending calculations and ratios to assess the deal in detail. These calculations will let you know where you stand even before you go out and speak to development finance brokers.

Be sensible in your cost assumptions to mitigate against things going wrong and be very clear on your exit strategy for any project irrespective of the size.

Finally, with little, you can control much, and in this case, there is a lot of money to make in property development, but there is also a lot of money can be lost. It is vital to bear in mind that with great rewards comes significant risk. The plan should be to be prepared for the risks.

I am fortunate to have some fantastic brokers around me, so please let me know if you want me to put you in touch with any of them.

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