100% Build Costs Funded. So Why Do I Still Need Cash?

“100% of build costs funded” sounds straightforward. If the construction budget is £800,000 and the lender is prepared to fund £800,000, a developer arranging their first development facility could reasonably assume that the build itself has been taken care of.

That is an easy misunderstanding to make. The lender may genuinely be prepared to fund 100% of the approved construction budget. What does not follow is that 100% of the development is funded, that the whole £800,000 is available from day one, or that the developer will never need to introduce more cash.

For somebody undertaking a first development, understanding that distinction can prevent an expensive surprise. Established developers generally understand the basic mechanics perfectly well, but they face a more difficult version of the same problem. A project that was properly funded at the outset can cease to be properly funded when costs rise, completion slips or another development begins drawing on the same pool of liquidity.

The real question is therefore not simply how much the lender will fund. It is how much room the finance structure has when the original appraisal starts to change.

100% of what?

Take a development site costing £500,000 with an approved construction budget of £800,000. There will also be acquisition costs, professional fees, finance costs and other expenditure associated with completing the scheme.

The lender agrees to fund 100% of the £800,000 build budget. There is nothing misleading about that description. It simply refers to one part of the development.

The developer still needs to understand what falls within the approved cost plan, what sits outside it and where their own equity is required. More importantly, the £800,000 construction facility will not normally be handed over at the start of construction. Development funding is typically released progressively as works proceed and the lender becomes satisfied with progress, expenditure and the remaining cost to complete.

This creates an important distinction between funding a cost and having the cash available when that cost falls due.

The contractor’s payment timetable and the lender’s drawdown timetable do not necessarily coincide. Work is undertaken, payments become due, progress is assessed and funding is released. Depending on the facility, part of an approved amount may also be retained until practical completion or another agreed milestone.

It is therefore entirely possible for the lender ultimately to fund a construction cost in full while the developer still needs sufficient liquidity to meet the expenditure before the corresponding money is received.

If everything proceeds according to plan, that cash can effectively recycle through the development. The problem starts when the sequence is disturbed by a delayed drawdown, an unagreed variation, an earlier contractor payment or the next stage of work beginning before the previous funding has arrived.

None of those events necessarily turns a good development into a bad one. They do change the amount of cash needed to keep it moving. That is why the developer’s peak cash requirement during the project can sometimes be more revealing than the headline percentage of build costs being funded.

The real difficulty begins when the appraisal changes

Now suppose the £800,000 construction budget increases by £70,000 because of unforeseen works and variations.

The gross development value, or GDV, may be unchanged. If the original projected profit was £400,000, the development could still be expected to make £330,000 before allowing for any additional finance costs caused by delay.

On paper, it remains profitable. But somebody still has to find the additional £70,000 required to finish the work.

Perhaps contingency absorbs it. Perhaps legitimate savings can be made elsewhere. Perhaps the lender agrees additional funding. Otherwise the developer needs to provide the cash.

At that point, the original agreement to fund 100% of build costs has become much less important. The lender’s concern is whether the remaining facility, together with the developer’s available resources, is still sufficient to complete the scheme. That is the cost-to-complete question.

There is also a second-order effect. If the additional works delay practical completion by three months, the £70,000 problem can create further interest, additional site and professional costs, later sales receipts and less time before the development facility reaches maturity.

Development risks rarely arrive as neat, independent entries in a sensitivity table. A cost problem can become a programme problem, which becomes a finance-cost problem and eventually an exit problem.

This is where experienced developers can still become exposed. They may understand each individual risk very well but underestimate what happens when several of them move together.

A profitable development can still run out of cash

The distinction between profit and liquidity is fundamental. Our development may still be expected to produce more than £300,000 of profit and there may be substantial equity in the property. Neither necessarily provides the £70,000 needed today.

Profit is realised at the end of the development. Liquidity is required throughout it.

A developer can therefore have a profitable appraisal, significant property equity and insufficient accessible cash at the same time.

For an established developer, the problem becomes more complicated when several projects are running simultaneously. They may be held in separate special-purpose companies and each may look comfortably funded on its own appraisal, but economically they can still depend upon the same developer’s underlying liquidity.

One project requiring another £70,000 may be easily absorbed. Several projects encountering additional costs or delays at broadly the same time may not be. The same sales market may affect several exits, the same interest-rate environment can affect several refinances and a contractor problem may touch more than one scheme. Separate projects do not necessarily mean separate financial risks.

When one project starts affecting the others

The legal separation between development companies remains important. A lender to one company does not automatically acquire rights over assets belonging to another simply because the same developer stands behind both.

The financial separation can nevertheless be weaker than the corporate structure suggests. If the developer has given a personal guarantee for one company’s borrowing and that company defaults, a claim under the guarantee can affect the developer’s personal resources. Cash or assets that might otherwise have supported another development may therefore no longer be available for that purpose. Cross-guarantees or additional security can create even more direct connections.

At the more serious end, a lender may enforce its security and appoint a fixed-charge receiver, commonly referred to as an LPA receiver, over the secured development. The appointment does not in itself mean that the developer or borrowing company is insolvent. The receiver is dealing with the charged property following a relevant default.

This can produce a situation which appears irrational from the developer’s perspective. A scheme may be close to completion, contain substantial equity and still be capable of producing a profit, yet the lender may enforce.

The developer sees the remaining value and thinks that another few months or some additional cash should allow the scheme to finish. The lender has to ask a different question. The original cost plan or programme has failed, the facility may already be in default and further exposure is now being requested. It therefore needs evidence that continuing is preferable to enforcing.

An updated cost-to-complete position, credible revised programme, evidence of available liquidity and a realistic exit become far more important than confidence that the development should eventually make money.

Committed does not always mean drawable

Suppose that, of the £800,000 build facility, £400,000 remains undrawn. It is tempting to conclude that the project therefore has £400,000 available.

Not necessarily.

That money was committed against an agreed cost plan, programme and funding structure. Future releases remain subject to the terms of the facility and to the lender being satisfied with the developing position.

If costs have risen, contingency has been depleted or the programme has deteriorated, the lender and monitoring surveyor will be considering whether the remaining money is sufficient to reach completion. The £400,000 cannot simply be treated as a reserve available to solve whatever problem subsequently arises.

There is therefore a difference between the amount committed, the amount currently drawable and the cash actually accessible to the developer when it is needed. That distinction attracts little attention while everything is going well. It can become decisive when it is not.

The useful question is how much room the structure has

None of this is an argument against 100% build-cost finance or higher-leverage development funding. There are perfectly rational reasons for a developer not to put more capital into a development than necessary. Capital tied up in one project cannot be deployed elsewhere, and an appropriately structured facility can make efficient use of the developer’s resources.

The mistake is confusing efficient use of capital with leaving no room for error.

A relatively straightforward development does not necessarily require an elaborate model. The EAS Project Finance Analyser provides a simpler way to test the principal acquisition, development, funding and exit assumptions.

Where the funding structure is more involved, the EAS Finance Workspace allows the transaction to be examined in greater detail, including staged borrowing, changing cash requirements, finance costs and the effect of altering important assumptions.

Neither tool predicts what a lender will approve, what the finished development will be worth or what construction will ultimately cost. Their purpose is to expose the assumptions and show how dependent the transaction is upon them while there is still time to reconsider the structure.

So if a lender is funding 100% of the build costs, why might the developer still need cash? Because 100% describes the lender’s contribution towards an agreed construction budget. It does not tell you when that money becomes available, whether all of it will remain drawable if circumstances change, or how much financial resilience the development has if cost, time and exit move against it together.

For the first-time developer, understanding that distinction can prevent an expensive misunderstanding.

For the experienced developer, the harder question is whether one project going wrong can be contained without putting the next one at risk.