3 min read
The development finance stack
A property development is typically funded by a combination of equity (the developer's own capital or investor equity), senior debt (the main development loan), and sometimes mezzanine finance (a second-charge loan filling the gap between senior LTV and the equity available). Each layer has a different cost, security position, and repayment priority.
Senior development lenders typically advance to 55–70% of gross development value (GDV) — the projected end value of the completed scheme. Directors should understand that GDV is a forecast: if sales values fall or costs overrun, the LTGDV metric deteriorates and the lender's security may thin. Sensitivity analysis around GDV and cost is a standard requirement of any development finance application.
Senior development finance: structure and drawdown
A senior development loan is typically structured as a facility agreement that allows staged drawdown against certified stages of construction — foundations, frame, watertight, fit-out, completion. A quantity surveyor appointed by the lender monitors works and certifies drawdown requests. This protects the lender but also creates administrative requirements the developer must plan for.
Interest is almost universally rolled up during the construction period rather than paid current. Rolled interest increases the total facility balance, which must be accounted for in GDV headroom calculations. The facility is repaid in full on sale or on refinance to a buy-to-let or commercial investment mortgage.
Mezzanine and stretched senior finance
Where a developer cannot contribute sufficient equity to meet the senior lender's LTV requirements, mezzanine finance — a second-charge loan from a different provider — can bridge the gap. Mezzanine is more expensive than senior debt and carries an intercreditor agreement between the two lenders that governs enforcement rights.
Some lenders offer stretched senior finance — a single facility at a higher LTGDV (sometimes up to 85–90%) — which simplifies the structure but increases cost relative to conventional senior lending. Directors should model the all-in cost of the funding stack carefully before selecting between a two-tranche and a stretched single-lender approach.
Bridging finance in development
Bridging loans serve specific, short-term purposes in development: acquiring a site quickly before development finance is arranged, funding light refurbishment, or bridging the gap at completion between a development finance expiry and a refinance. They are not development finance substitutes — the cost and term are materially different.
A clear and credible exit route is non-negotiable for a bridging facility. Lenders will not extend a bridge indefinitely; directors must demonstrate that the exit (sale, refinance, or development finance drawdown) will occur within the agreed term.
SPV structure and personal guarantees
Most UK property developments are conducted through special purpose vehicles — single-asset limited companies — to ring-fence each project's risk, simplify accounts, and facilitate joint venture structures. Development lenders are familiar with SPV borrowers and will lend to the SPV rather than requiring a trading company to be the borrower.
Personal guarantees from directors or shareholders are commonly required by development lenders, particularly for less established developers or higher-risk schemes. The extent and cap of any personal guarantee is a key negotiating point and has significant personal financial implications; legal advice before signing is essential.
Frequently asked questions
What is gross development value and why does it matter so much to lenders?
GDV is the aggregate estimated end value of the completed development — the sum of all unit sale prices or the investment value of a completed commercial scheme. Lenders express their maximum loan as a percentage of GDV because it is the metric that captures both upside (if values rise) and downside (if values fall). A loan that looks well-secured at 65% LTGDV on an optimistic GDV may be less comfortable at 80% LTGDV if values are restated downward.
Can a development be funded without any developer equity?
This is extremely rare in the commercial lending market. Even at maximum senior-plus-mezzanine gearing, a developer needs to contribute something — land equity (where the land is owned free of debt), profit from pre-sales, or investor equity. Zero-equity structures exist but are uncommon, expensive, and typically available only to developers with a very strong track record.
Does Credicorp provide development finance?
Credicorp is a commercial lender to UK limited companies. Appetite for specific development finance structures depends on the scheme, the developer's track record, and the individual circumstances — contact us to discuss.
Funding for UK limited companies
Credicorp lends to your company, not to you personally — short-term working capital with no personal guarantee. See what your business could access.