Development loan vs bridging loan, GDV, LTC and loan sizing — the fundamentals of development finance
DEVELOPMENT LOAN vs BRIDGING LOAN: (a) BRIDGING LOAN (regulated or unregulated): short-term (1-24 months); full drawdown on day one; interest rolled up or serviced monthly; property offered as security in current state; loan sized against existing OMV (typically 70-75% LTV); used for: auction acquisition; light to moderate refurbishment (new kitchen, bathrooms, decoration, minor structural works); exit: BTL refinance or sale. (b) DEVELOPMENT LOAN: specialist lending for new builds; conversions; heavy refurbishment; uninhabitable properties; property CANNOT be offered as security at current value without substantial reduction; loan sized against GDV (typically 60-70%) AND total project costs (LTC: typically 65-90%); staged drawdown with monitoring surveyor; duration: typically 12-36 months; exit: development exit bridge; BTL refinance; sale. GDV (GROSS DEVELOPMENT VALUE): the estimated open market value of the completed development (all units, all floors) — assessed by a RICS-registered development valuer based on comparable sales, planning consents, and risk adjustment (typically 5-15% discount for planning and market risk). LOAN-TO-COST (LTC): development lenders advance between 65% and 90% of total project costs — the higher range (85-90%) is achieved by adding mezzanine finance. Total project costs include: land purchase; planning and professional fees (architect; structural engineer; QS; planning consultant; legal); construction costs plus 10-15% contingency; finance costs (rolled-up interest; monitoring surveyor; arrangement fee; broker fee); VAT (recoverable on qualifying residential conversions — zero-rated new build; partially recoverable on mixed conversions). DEVELOPMENT APPRAISAL: a formal appraisal (Argus Developer or Excel model) is required showing: GDV; total costs; loan; rolled-up interest; fees; developer profit margin (minimum 15-20% on GDV or 20-25% on cost — lenders will not advance where the margin is insufficient to absorb cost overruns and market movements).
Staged drawdown, rolled-up interest, mezzanine finance, development exit facility and lender landscape
STAGED DRAWDOWN FACILITY: development loans are drawn in tranches (typically 5-8) as the project progresses. Typical sequence: (a) initial draw — site acquisition or refinance of existing ownership; (b) construction tranches — foundations; frame; watertight; first fix; second fix; practical completion; each tranche requires monitoring surveyor inspection and sign-off. DRAWDOWN MECHANICS: borrower submits drawdown request with QS cost plan, site photographs, subcontractor invoices, and monitoring surveyor report; the lender's monitoring surveyor verifies the claimed completion percentage; the lender releases the tranche (typically 3-5 working days from a clean surveyor report). Staged drawdown reduces interest roll-up on undrawn funds — the borrower only pays rolled-up interest on amounts actually drawn. ROLLED-UP INTEREST: development finance typically uses rolled-up (capitalised) interest — no monthly payments during construction; interest accrues daily on the drawn balance and is added to the loan balance; repaid from sale proceeds or exit finance at practical completion. The gross loan facility is usually structured to include an interest reserve to avoid the borrower needing to service interest from their own funds during construction. Example: £1,500,000 development loan at 0.8% per month over 18 months; indicative total rolled-up interest approximately £216,000. MEZZANINE FINANCE: where the senior lender's maximum (65-75% of costs or 60-65% of GDV) is insufficient, mezzanine finance provides additional funding — the mezzanine tranche sits above the senior debt but below the developer's equity; mezzanine lender takes a second charge on the development site; rates typically 15-25% per annum (rolled up); combined LTC with senior + mezzanine can reach 80-90% of total costs. DEVELOPMENT EXIT FACILITY: at practical completion (building regulations certificate issued), the development exit bridge refinances the development loan onto lower-cost facilities — completed units now have a definable market value; exit rates: typically 0.5-0.9% per month; duration: 6-18 months; exit by individual unit sales, en-bloc sale, or BTL mortgage refinance. LENDER LANDSCAPE (specialist development finance lenders — not high-street banks): Maslow Capital; United Trust Bank; Octane Capital; Blend Finance; Hope Capital; Assetz Capital; Hampshire Trust Bank; Shawbrook Bank; Aldermore Bank; Together Money; LendInvest; Allica Bank. Specialist broker required (1-2% of facility); development appraisals and lender relationships are essential.