The top 5 questions about development finance

For property investors and developers, securing the right funding is the cornerstone of any successful project. While bridging loans can get a project off the ground, development finance is the tailored solution for large-scale, comprehensive building projects. This specialised funding is designed to cover the entire lifecycle of a development, from purchasing the land to building and selling the finished units.

At Breeze Capital, we understand that development finance can seem complex. To help you navigate this space, we’ve compiled answers to the top five questions we’re asked.

1. How Does Development Finance Differ from a Bridging Loan?

This is perhaps the most crucial question, as the two products are often confused. While both are short-term, asset-backed loans, their purpose and structure are fundamentally different.

• Bridging Loan: A Quick Fix. Think of a bridging loan as a temporary “bridge” to get you from point A to point B. It’s ideal for time sensitive, short term needs, such as:

  • Buying a property at auction.

  • Securing a property that’s currently unmortgageable due to its condition.

  • Refurbishment finance for minor, cosmetic work (light refurbishment). The key characteristic is that the entire loan amount is typically released as a single lump sum at the start of the term.

• Development Finance: A Project Partner. Development finance is an all-encompassing solution designed for the entire construction process. It’s for more complex, long-term projects like:

  • Ground-up new builds on a vacant plot of land.

  • Major conversions, like turning an old office block into residential flats.

  • Heavy refurbishment, involving structural work, extensions, or creating multiple units. The most significant difference is the staged drawdown. Funds are released in tranches at various stages of the build. This ensures you only pay interest on the money you’ve actually used, making it a highly cost-effective option for long-term projects. The lender also uses an independent monitoring surveyor to inspect the site before each new tranche of funds is released, ensuring the project is on track.

In short, a bridging loan is for a quick purchase; development finance is for a full construction project. Sometimes, a developer will even use a bridging loan to buy the land and then refinance onto a development loan to fund the build.

2. How Are Loan Amounts Calculated (LTC, GDV, Deposit Requirements)?

Development finance is not simply based on the current value of the property. Lenders like Breeze Capital look at the entire project’s viability and future value. The key metrics used to calculate the loan amount are:

• Loan to Cost (LTC): This is the percentage of the total project costs that the lender will fund. Total project costincludes everything: the cost of the land, the build costs, and associated fees (legal, professional, etc.). An LTC of 80% means the lender will provide 80% of the total cost, and the developer must contribute the remaining 20% as a deposit.

• Gross Development Value (GDV): This is the most critical figure. The GDV is the predicted end value of the completed project on the open market. It’s a professional valuation based on comparable sales in the area.

• Loan to GDV (LTGDV): Lenders also cap the loan based on a percentage of the final GDV. A typical LTGDV might be 60-70%. This protects the lender by ensuring there is a sufficient buffer of equity in the project.

The final loan amount will be the lower of the two figures (LTC and LTGDV). For example, a lender might offer up to 80% LTC or up to 65% of the GDV, whichever is lower. This ensures a healthy profit margin for the developer and a secure investment for the lender.

3. What Are the Exit Options for Development Loans (Refinance, Sale, Development Exit Finance)?

A viable exit strategy is non-negotiable for development finance. It’s a clear, pre-agreed plan for how you will repay the loan at the end of the term. The most common exit options are:

• Sale of the Developed Property: This is the most straightforward and common strategy. The developer sells the completed units (or the entire development) on the open market, using the proceeds to repay the loan and pocketing the profit.

• Refinance: If the developer intends to keep the property as a long-term investment (e.g., as rental units), they will refinance the development loan onto a long-term commercial or buy-to-let mortgage.

• Development Exit Finance: This is a crucial backup option. Sometimes, a project is completed but the units haven’t sold yet, or a long-term mortgage has been delayed. In these situations, a development exit loan—a type of short-term bridging loan—is used to repay the more expensive development finance and provide more time to find a buyer or secure a long-term mortgage. It’s a way to avoid penalties and give you some breathing room.

Having a robust exit strategy with supporting evidence is essential to get your loan approved and for the overall success of your project.

4. What Experience or Credentials Do Developers Need to Qualify?

This is a key consideration, especially for new entrants to the market. While a track record is highly valued, a lack of extensive experience doesn’t necessarily disqualify you. Lenders look at a combination of factors:

• Project Viability: The strength of your project is paramount. This includes a detailed, realistic business plan, a comprehensive schedule of works with realistic costs, and robust market research proving the demand for your finished product.

• The Team: Lenders want to see a capable, experienced team. This includes your architects, contractors, quantity surveyors, and project managers. A strong team with a proven track record can compensate for a developer’s lack of personal experience.

• Personal Contribution: As mentioned earlier, lenders want to see that you have a significant financial stake in the project. Your equity contribution (deposit) demonstrates your commitment and willingness to share the risk.

• Credit History: While development finance is less sensitive to credit issues than a residential mortgage, a good credit history helps. However, at Breeze Capital, we assess each case individually. We understand that not all bad credit is equal and we take a common-sense view, focusing on the quality of your project and your ability to deliver it.

In essence, a lender is investing in your ability to deliver a profitable project. Demonstrating your competence, and surrounding yourself with professional expertise, is key to securing finance.

5. What’s the Difference Between Bridging Loans and Development Finance?

This question is a duplicate of a previous one, but it is so fundamental to this industry that it’s worth revisiting and reinforcing.

• Bridging Loans: Fast, flexible, and short-term. They’re for bridging a gap in funding, often used for property purchases where speed is critical.

• Development Finance: A structured, staged funding solution for the entire life cycle of a major building project, from land purchase to completion.

The core distinction is in their purpose and funding mechanism: bridging loans provide a single lump sum for a specific short-term need, while development finance provides staged drawdowns to fund a full construction project.

Summary

Development finance is a specialized and powerful tool for property developers, offering a comprehensive funding solution for complex projects. Unlike bridging loans, which provide a single cash injection, development finance is released in stages, making it a highly efficient way to manage project costs. Loan amounts are calculated based on the project’s total cost (LTC) and its future value (GDV), and a clear exit strategy is a non-negotiable requirement.

While some experience is beneficial, a developer’s ability to secure funding depends more on the viability of their project, the strength of their professional team, and their personal financial contribution.

Understanding these key questions is the first step towards a successful development project. For a tailor-made solution or to discuss your project in detail, don’t hesitate get in touch.

For more information on how Breeze Capital can help you with your property requirements, please call us on 01244 565095

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