Development and construction finance

Development finance is aimed at developers, whether experienced housebuilders or businesses undertaking their first scheme, who need staged funding to construct or convert a property for sale or long-term letting. It suits schemes with detailed planning consent in place and a credible, costed build programme, rather than speculative land purchase ahead of planning.

It is equally relevant for ground-up new build and substantial refurbishment or conversion projects, provided the works are significant enough to justify staged monitoring. Smaller, light-refurbishment projects are often better served by bridging finance, which is quicker to arrange and does not require the same level of build monitoring.

Development finance is drawn in tranches against certified progress, verified by an independent monitoring surveyor appointed to protect the lender's position. Interest is typically rolled up and added to the loan balance rather than paid monthly, with the full balance, including rolled interest, repaid on sale or refinance once the scheme completes.

Where senior debt alone does not cover the full cost, mezzanine finance or preferred equity can be layered beneath the sponsor's own equity to reduce the cash the developer needs to inject, in exchange for a higher blended cost of capital. Joint-venture equity structures go further, with an equity partner funding some or all of the developer's contribution in exchange for a profit share, suited to experienced developers seeking to preserve cash across several schemes.

Senior lenders focus on gross development value, total project cost, the experience and track record of the developer and contractor, and the robustness of the planning consent. A detailed appraisal showing realistic build costs, a sensible contingency and a credible sales or letting strategy on completion is central to a fundable proposal.

The strength of the professional team — architect, quantity surveyor, main contractor and monitoring surveyor — is assessed alongside the numbers, since execution risk is as significant to a lender as the underlying appraisal. First-time developers are not automatically excluded but will typically be asked to demonstrate a strong contractor relationship and may face lower leverage than an experienced sponsor.

Senior development finance is typically priced with an arrangement fee, an ongoing interest margin over a reference rate, and an exit fee calculated on gross development value or the loan amount, reflecting the higher risk and monitoring cost relative to a standard term loan. Mezzanine and preferred equity carry materially higher indicative returns, reflecting their subordinated position in the capital stack.

Additional costs include the monitoring surveyor's fees, valuation costs at each stage, and legal fees for both borrower and lender, which are proportionately higher on development transactions than on standard property finance due to the staged drawdown mechanism and the additional due diligence involved.

GFG reviews the appraisal, planning status, professional team and the developer's track record before assembling a capital stack appropriate to the scheme, drawing on senior lenders and, where required, mezzanine or equity providers within its network. A well-prepared appraisal with realistic costings materially improves both the range of terms available and the speed of the process.

Timescales vary with scheme complexity, but indicative terms are often available within two to three weeks of a complete pack, with full facility documentation typically taking a further four to eight weeks given the monitoring surveyor and legal work involved. GFG's fee is success-based and payable only once the facility is in place.