What is Development Finance?
Development finance is specialist debt for property developers — used to fund the acquisition, construction, and completion of residential or commercial schemes. Unlike bridging finance, which is drawn as a single advance, development finance is released progressively as construction stages are achieved and certified by an independent monitoring surveyor.
Development finance is assessed against two primary leverage metrics: LTGDV (Loan to Gross Development Value) and LTC (Loan to Cost). Both must pass independently. A scheme that exceeds either threshold will need to be restructured — either through reduced loan amount, increased equity, additional presales, or mezzanine capital.
Facility terms typically run from 12 to 36 months depending on scheme complexity, with interest typically rolled into the facility. The development period is followed by a sales period, and the facility is repaid from proceeds as units are sold or refinanced.
The Core Metrics
Gross Facility ÷ GDV
The primary leverage metric. Compares total lender exposure against the project's completed value. Uses gross facility (not net advances).
Loan ÷ (Purchase + Build)
Measures developer equity as a percentage of total project cost. Uses loan advances (not gross facility).
How Staged Drawdowns Work
Development finance is not drawn as a single advance. The facility is released in stages tied to construction milestones, monitored by an independent monitoring surveyor (MS). The MS inspects the site, certifies the value of work done, and recommends the drawdown amount. The lender releases funds against this certification.
Day one
Land drawdown — acquisition advance on completion of purchase.
Foundation
First construction drawdown once foundations are certified complete.
Frame / Roof
Second drawdown when structure is watertight.
First fix
Third drawdown once first fix MEP is certified.
Practical Completion
Final construction drawdown. Works certified complete.
How Brokers Package Development Deals
Development finance submissions require substantially more documentation than bridging. The minimum package typically includes: planning permission documents, a professional cost plan from a qualified QS, a GDV appraisal (with comparables), developer CV and track record, professional team details, and a development appraisal showing profit on cost and profit on GDV.
Brokers should model LTGDV and LTC before submission using gross facility (for LTGDV) and loan advances (for LTC). Presenting both on the same basis or using net advances for LTGDV are among the most common errors in development finance packaging.
Profit on GDV is increasingly reviewed by development lenders as a standalone metric. Most require a minimum 15–20% profit on GDV before LTGDV and LTC constraints are even assessed. A high-margin scheme with slightly elevated LTGDV may receive more flexibility than a thin-margin scheme at comfortable leverage levels.
How Lenders Assess Development Finance
Development lenders conduct a multi-stage credit assessment. The primary underwriting concerns are:
- GDV viability — is the projected GDV credible and supported by recent comparable sales?
- Build cost accuracy — does the QS cost plan support the build cost figure, with adequate contingency?
- Developer experience — has the borrower delivered comparable schemes on time and within budget?
- LTGDV and LTC compliance — do both metrics pass against the lender's criteria?
- Profit on GDV — is there adequate margin to absorb cost overruns and market softening?
- Exit clarity — does the developer have a credible sales strategy or pre-agreed occupier interest?
- Planning — is full planning in place? Outline planning or pre-application creates additional risk.
Common Mistakes
- Submitting without a professional cost plan. A developer’s own build cost estimate without QS sign-off is not acceptable to any development lender. The cost plan is the primary cost risk document.
- Omitting contingency from build cost. Lenders always model a stressed build cost. Submissions without contingency will have it added by the lender, increasing LTC and potentially breaching limits.
- Using net loan for LTGDV. LTGDV is gross facility ÷ GDV. Using net advances produces a materially lower LTGDV and will be immediately recalculated by the lender.
Frequently Asked Questions
What is the difference between development finance and bridging finance?
Bridging finance is primarily for acquisition or short-term capital needs with a property exit. Development finance is specifically structured for building or significantly converting a property — it includes a staged drawdown mechanism tied to construction progress, monitored by a professional. Development finance terms are longer and the underwriting is more complex.
How do staged drawdowns work?
Instead of drawing the full loan on day one, development finance is released in tranches as construction milestones are met. A monitoring surveyor (independent of borrower and lender) inspects progress and certifies each drawdown. This protects the lender by ensuring the facility advances in line with work done.
What is mezzanine finance in development?
Mezzanine finance sits between senior debt and the developer's equity. It is used when the senior lender's LTGDV or LTC limits are reached but the developer needs additional funding. Mezzanine carries higher interest rates and subordinated security. Combined LTGDV including senior and mezzanine can reach 80–85%.
What GDV evidence does a development lender require?
Lenders require a formal RICS red book valuation of the completed GDV, typically from a panel surveyor. They also assess comparables for recent sales of similar units in the same market. The formal valuation must be within an acceptable tolerance of the broker's projected GDV.
What is profit on cost and profit on GDV?
Profit on cost is (GDV − Total Cost) ÷ Total Cost. Profit on GDV is (GDV − Total Cost) ÷ GDV. Most lenders require minimum profit on GDV of 15–20% to ensure the scheme is viable and provides adequate buffer for cost overruns and market softening.