Start with a coherent summary of the whole scheme

A lender should be able to understand the transaction quickly and accurately. That does not mean reducing a complex development to a few optimistic headline figures. It means presenting the relevant information in a logical order.

A useful initial summary should cover:

• the site address and current ownership;
• the proposed development and number of units;
• the planning position;
• purchase price or current site value;
• build cost and total project cost;
• expected Gross Development Value;
• amount of finance required and borrower equity;
• proposed build programme;
• intended exit through sale, refinance or a combination of both;
• the developer, contractor and wider professional team.

If the lender has to piece the project together from separate emails, drawings, spreadsheets and incomplete documents, the application begins at a disadvantage. Development finance is a specialist credit decision. Clarity makes the lender’s work easier, but it also exposes weak assumptions early enough to address them.

For an overview of how a facility is structured, including staged drawdowns and monitoring, see our Development Finance guide.

Planning permission is important, but it is not the whole planning position

Lenders need to know whether the project has a workable route to commencement and completion, not simply whether there is a planning reference number.

The usual evidence includes the decision notice, approved plans and details of any pre-commencement conditions. Depending on the scheme, the lender may also need to understand planning obligations, Community Infrastructure Levy exposure, ecology matters, highways requirements, building-control position and any party-wall or neighbour issues.

A permission with significant conditions outstanding may still be financeable. However, the programme needs to allow for those matters, and the borrower needs to show how they will be discharged. A delayed start affects interest costs, contractor arrangements and the time available for the exit.

Planning permission and building-regulations approval are separate requirements. The Government confirms that building-regulations approval may still be required where planning permission has been granted. Read the Government guidance on building-regulations approval.

The cost plan needs to be detailed, credible and complete

Build cost is one of the central underwriting risks in development finance. Lenders do not expect every figure to be fixed forever, but they do expect the cost plan to be sufficiently developed to support the proposed facility and to reflect the actual scheme, specification and procurement route.

The evidence normally includes:

• a detailed build-cost breakdown;
• professional fees;
• demolition, enabling and abnormal costs where relevant;
• utilities and service connections;
• planning obligations and statutory costs;
• warranties, insurances and monitoring costs;
• finance costs, contingency and VAT treatment.

A single line stating “build cost: £1.2 million” is rarely enough. The lender needs to understand what sits beneath that number and whether major omissions have been allowed for.

Contingency should be a genuine allowance for uncertainty, rather than an amount inserted only to make the appraisal look complete. The right level depends on the nature of the project, its stage of design, site complexity, contractor arrangements and the risk of abnormal costs.

The developer and delivery team matter

A lender is not only lending against the property. It is lending against the ability of the people involved to turn a plan into a completed and saleable asset.

Relevant information normally includes the developer’s CV, development track record, company structure, current projects, financial commitments and available liquidity. Where the borrower is inexperienced, that does not automatically prevent funding. It can, however, affect leverage, lender choice and the evidence required.

For first-time or less experienced developers, lenders may take comfort from a simpler scheme, meaningful borrower equity, a reputable main contractor, an experienced project manager or employer’s agent, and a strong professional team.

Gross Development Value needs independent support

GDV is the anticipated market value of the completed development. It is one of the figures against which lenders assess leverage, but it should never be treated as a guaranteed future outcome.

The lender will usually obtain an independent valuation. Before that point, the developer’s appraisal should be supported by appropriate local comparables, not merely current asking prices for the best competing properties.

• Are the comparables genuinely similar in location, size, condition and tenure?
• Do they reflect achieved sales where possible?
• Is the assumed sales rate realistic?
• Is the product suited to local demand?
• What happens to leverage and profit if values are lower than anticipated?

Lenders need to see genuine borrower equity

The developer’s equity is not just a deposit. It is part of the lender’s protection against cost overruns, programme delays and lower sales values.

The application should show where the equity comes from, when it will be introduced and what liquidity remains after completion. If funds are being contributed by another company, investor or family member, the lender may require evidence of source, control and terms.

A proposal can look acceptable at day one but become vulnerable if all available cash is used on acquisition and there is no capacity to meet a cost overrun. A lender will therefore consider both the initial contribution and whether the borrower has sufficient resilience through the project.

The programme must allow for the whole journey, not just construction

A construction programme is often presented as the period from starting work to practical completion. The lender is interested in the wider period during which its loan remains outstanding.

• satisfying pre-commencement conditions;
• legal completion and site mobilisation;
• construction, inspections and drawdowns;
• practical completion;
• marketing and sales;
• refinancing or legal completion of the exit.

The facility term must accommodate the project realistically. A 12-month build programme does not necessarily mean that a 12-month development facility is sufficient. Delays increase finance costs and compress the time available for sales or refinance.

The exit needs evidence, not intention

Every development facility needs a credible repayment route.

Where the exit is sale, the lender will examine GDV, sales evidence, marketing strategy, expected sales pace and the time allowed after completion. Where the exit is refinance, the future lender’s criteria should be considered before construction funding is committed. Value alone may not be enough. An investment lender may also assess rental income, interest cover, ownership structure, borrower experience and the condition of the completed property.

Development exit finance can be useful where construction is complete but sales require more time. It is not a substitute for an exit that was weak from the beginning. It should be considered as part of a wider plan, rather than assumed as an automatic solution if the original facility approaches maturity.

For shorter-term acquisition or stabilisation requirements, bridging finance may be more appropriate than development finance. For a completed commercial asset being retained, longer-term commercial finance may form part of the exit strategy.

Prepare one lender-ready credit case

The objective is not to produce a glossy presentation. It is to give the lender enough evidence to understand the opportunity, identify the principal risks and decide whether the facility is within appetite.

• executive transaction summary;
• borrower and ownership-structure information;
• site details and title documents;
• planning documentation;
• development appraisal and detailed cost plan;
• programme, contractor and professional-team information;
• valuation or comparable-sales evidence;
• evidence of borrower equity;
• exit strategy, key risks and practical mitigants.

Where a project is complex, it is better to identify the difficult points openly and explain how they are being addressed. A lender will usually find them anyway. Properly framed risk is more credible than an application that assumes nothing can go wrong.

Test the scheme before approaching lenders

Development finance should support a viable scheme, not rescue one whose costs, value, programme or exit do not stand up to realistic scrutiny. We review the project from the lender’s side before selecting the lenders most likely to fit.

Discuss your development

This article provides general information about commercial property development finance and does not constitute personal financial advice. EAS Finance is a trading name of Elite Admin Services Ltd (FRN 1044838), an appointed representative of White Rose Finance Group Ltd (FRN 630772), authorised and regulated by the Financial Conduct Authority. EAS Finance is a credit broker, not a lender. Lending terms and criteria vary by lender and transaction.