Development finance

How the facility is put together

A development facility has two halves. There is an initial advance towards the land or the existing building, and there is a build facility that funds the construction. They are agreed at the same time and drawn at different times, and it is the second half that people misunderstand.

The build money is not handed over at the start. It is released in stages against work that has actually been completed, and normally in arrears — you carry out the stage, it is inspected, then the funds follow. Some lenders will consider an advance drawdown on specific items, but you should plan on the arrears assumption unless it has been agreed in writing.

That single fact governs your cash flow. Between paying a subcontractor and receiving the drawdown, the money is yours, not the lender's. Developers who plan on the balance of the facility being available on demand run out of working capital in the middle of the build, which is the most expensive place to run out.

The monitoring surveyor

The lender appoints a monitoring surveyor, at your cost, to check the scheme before it starts and then to sign off each stage as it completes. Before the facility opens the surveyor reviews the appraisal, the build costs, the programme, the contract, the professional team and the contingency, and reports on whether the numbers are credible.

Once building starts, the surveyor's visits set the rhythm of your funding. A drawdown follows an inspection and a report, not a phone call. If a stage is not finished, or is finished badly, the release is reduced or held.

It is worth being straightforward with the surveyor rather than optimistic. A report that flags a genuine problem early can usually be worked around; a report that contradicts what you told the lender is a much harder conversation, and it follows you into the next application.

The appraisal, and the numbers lenders test

Every scheme is assessed through an appraisal that sets the purchase or existing value, the total cost of building, the professional fees, the finance costs and the expected value of the finished scheme. That last figure is the gross development value, and it is what a lender means when it talks about GDV.

The lender will size the facility against both the cost of the scheme and the gross development value, and it will take the more conservative of the two. It will also test the value with its own valuer rather than accepting yours.

The cases we see fail on the appraisal share the same faults. Build costs taken from an out of date estimate. Professional fees and finance costs left out of the total. A contingency that exists on paper but has already been spent in the borrower's mind. And end values drawn from asking prices in a stronger market rather than from what has actually sold nearby.

Contingency is not padding

Lenders insist on a contingency within the build budget, and they insist on it because on almost every scheme something is found once work starts. Drainage that is not where the drawing says. A structure that needs more support than expected. A material that has gone up in price since the quote. A stage that takes longer because of weather or a delayed inspection.

The contingency is the difference between absorbing that and going back to the lender for more money mid-build, which is slow, uncertain and expensive. A borrower who wants to strip the contingency out to make the numbers work is usually telling the lender, without meaning to, that the scheme does not work.

Where schemes come apart

Schemes fail on the build programme and the contingency, not the headline rate. Interest accrues for every month the build overruns, and by the time a developer is negotiating an extension the saving on the rate has long since gone.

Your own cash in the scheme

Lenders expect the developer to have real money at risk, and they will want to know where it came from. Equity in land already owned can count towards that, and so can a genuine discount to open market value where a valuer supports it, but a scheme funded entirely by other people rarely gets away.

Expect questions about whether any of your contribution is itself borrowed, and about how you will fund the gap between paying for work and receiving the drawdown. Where investors are involved, the lender will want to see the arrangement documented rather than described.

Planning status changes everything

A site with detailed planning consent for the scheme you intend to build is the straightforward case. Everything else is harder, and the difficulty is not a matter of the rate but of whether a lender will look at all.

• Detailed consent in place: the usual route, and the lender is assessing build and value rather than whether the scheme can happen
• Outline consent only: fundable by fewer lenders, and the facility often cannot open properly until detail is approved
• No consent at all: the land is worth its existing use value, not its hoped-for development value, and lending against the difference is rarely available
• Conditions to discharge before work starts: these are routinely underestimated and can hold up the first drawdown
• Permitted development or prior approval routes: workable, but the lender will want the position confirmed rather than assumed
• Section 106 obligations and community infrastructure charges: real cash costs that belong in the appraisal

If you are buying land in the hope of consent, that is a bridging or land purchase conversation, not a development finance one, and it should be structured knowing that the build facility depends on an outcome nobody can promise.

Experience and track record

Lenders are funding the delivery of a building, so they want to know who is delivering it. A developer with completed schemes of a comparable size and type, evidenced with photographs, final accounts and the names of the professional team, is straightforward to place.

A first scheme is fundable, but the case has to be built differently. That usually means an experienced main contractor under a proper contract, a stronger professional team, a more conservative facility, and complete honesty about what happens if the builder walks off site. What does not work is presenting inexperience as experience; the monitoring surveyor will establish the truth in any event.

Regulation, protections and default

Development finance is normally unregulated lending. It is not usually a regulated mortgage contract, which means the Financial Conduct Authority's mortgage conduct rules do not apply to the loan, and you would not have access to the Financial Ombudsman Service in respect of the lending itself. Personal guarantees and debentures are common, and where a company borrows, the directors are frequently on the hook personally.

This type of lending is not usually regulated by the Financial Conduct Authority. On unregulated lending you do not have the protections of the mortgage conduct rules and cannot refer a complaint about the lending to the Financial Ombudsman Service.

There is an exception worth knowing. Where the scheme is on a property that you or an immediate family member will occupy as a home, the borrowing can be a regulated mortgage contract, with the protections and the process that go with it. Self-build and a house being rebuilt for the owner's own occupation are the common examples, and we confirm the position on the facts before approaching anyone.

You should also be clear about what happens if the facility is not repaid at the end of the term. The lender can charge a default rate, take over the scheme, appoint a receiver, and take possession of and sell the security. Where guarantees have been given, it can pursue the guarantors for any shortfall. None of that is unusual or hidden; it is simply what the documents say, and it is why the exit and the programme deserve more attention than the pricing.

How we handle a development case

Specialist enquiries reach Nik Mair, our managing director, on the working day they arrive, and we place these cases direct with lenders' own underwriters rather than through a packager.

• We go through the appraisal line by line before we approach a lender, and we tell you where we think it will not survive scrutiny
• We confirm the planning position and what remains to be discharged
• We test the programme and the working capital you need between drawdowns
• We present your experience accurately, and where it is thin we build the case around the team instead
• We set out the full cost of the facility in writing, including our own fee, before you commit
• We keep the exit in view from the beginning, whether that is sale of the units or a term refinance

What we charge

Our fee is typically £495, though complexity moves it, and it is always disclosed in writing before you apply. Each stage of the fee is earned when that stage is reached and is not refundable after that point. Separately, you have the right to cancel within 14 days, as set out in our Terms of Business. We are usually also paid a procuration fee by the lender.