What Do Development Finance Lenders and Brokers Look for in UK Businesses?

Development finance is rarely approved because a project looks exciting.

A lender may agree that the location is attractive, the finished development should sell and the projected profit looks compelling.

That is not enough.

Before providing several million pounds towards a development, the lender needs to understand how the project gets from its current position to completion — and what happens if that journey does not go according to plan.

A development finance broker approaches the transaction from a slightly different direction.

Before presenting the scheme to lenders, an experienced broker should be asking:

Is this development genuinely financeable?

If it is, the next question is:

Which lenders are most likely to understand and support it?

Those two perspectives — lender and broker — overlap considerably.

And understanding what both are looking for can make a significant difference to the quality of your development finance application.

The project has to make commercial sense

Before discussing rates, leverage or lender appetite, there is a more fundamental question.

Does the development work?

A lender needs to understand what you are building, why there is demand for it and whether the numbers support the risk being taken.

That sounds straightforward.

In reality, this is where much of development finance underwriting begins.

A residential scheme might look attractive because there is a national shortage of housing.

But lenders do not finance national housing statistics.

They finance a specific development on a specific site in a specific market.

They will therefore want evidence that buyers or tenants are likely to want the finished product at the values assumed within the appraisal.

Your experience matters

Development finance lenders pay considerable attention to the people behind the project.

What have you developed before?

Were those schemes similar?

Did you complete them successfully?

How large were they?

What role did you personally play?

Were they completed on budget?

How were they exited?

A developer who has successfully delivered several comparable projects gives the lender evidence that they understand what can go wrong.

That does not mean first-time developers cannot obtain development finance.

They can.

But the wider team becomes considerably more important.

If you have limited direct development experience but have appointed an experienced contractor, architect, project manager, quantity surveyor and professional team, that can strengthen the proposition.

The lender is assessing the ability of the entire team to deliver.

First-time developer does not necessarily mean first-time business owner

This distinction can sometimes be overlooked.

Some borrowers may be undertaking their first property development while having twenty years of experience building and operating successful businesses.

That commercial experience still matters.

Likewise, somebody may be new to acting as principal developer but have spent years working professionally within construction or property.

A good broker should make that context clear.

Credit applications are rarely improved by reducing someone's experience to a binary box marked "first-time developer".

The lender needs to understand what relevant experience actually exists and where additional expertise has been brought into the project.

How much are you putting into the deal?

Developer equity matters.

Lenders generally want borrowers to have meaningful capital committed to the transaction.

This is often referred to as having skin in the game.

There is a practical reason for it.

Equity provides a buffer.

If costs increase or the project experiences difficulties, there is capital beneath the lender's position.

There is also a behavioural reason.

A developer with substantial personal capital invested in the scheme has a strong financial incentive to make it work.

The amount required will vary significantly depending on the lender, scheme, experience and proposed leverage.

But a proposal built around the assumption that the lender should take virtually all of the financial risk is likely to be difficult.

The site purchase price matters — but so does its value

These are not always the same number.

Perhaps the developer acquired the site below market value.

Perhaps planning has subsequently been obtained.

Perhaps significant work has already been completed.

Or perhaps the property has been owned for several years and its value has increased.

A broker should establish exactly what equity exists within the transaction and how lenders are likely to treat it.

This can materially affect the funding structure.

The amount of cash you physically contribute at completion is not always the complete story.

Planning certainty can change the entire transaction

Planning is one of the biggest dividing lines in development finance.

A site with full planning permission for the proposed scheme presents a very different risk from one where the development remains dependent on an uncertain planning outcome.

That does not mean finance before planning is impossible.

There are lenders prepared to consider planning risk and land acquisition.

But the lender pool, leverage, pricing and structure may change significantly.

For conventional development finance, greater planning certainty generally makes the transaction easier to assess.

The lender knows what can legally be built.

The valuation can reflect an established scheme.

The cost plan can be constructed around an approved design.

And the development programme becomes more credible.

In development finance, removing uncertainty tends to have value.

Lenders will interrogate the build costs

A development appraisal can show an attractive profit while still containing unrealistic construction assumptions.

Lenders know this.

They will look at the build cost carefully.

Depending on the scale and complexity of the development, a monitoring surveyor may review the cost plan before completion and monitor subsequent drawdowns throughout construction.

If your build cost is materially below what comparable projects would suggest, expect questions.

Perhaps there is a perfectly good explanation.

You may own the construction company.

Materials may already have been purchased.

A fixed-price contract may be in place.

But the lender needs evidence.

A low number in a spreadsheet is not the same thing as a low-risk build cost.

Contingency is not wasted money

Developers understandably want their appraisal to be efficient.

Lenders want it to be resilient.

Construction projects rarely proceed with absolute precision.

Ground conditions appear.

Materials change.

Labour costs move.

Weather creates delays.

Design amendments happen.

Something unexpected almost always occurs.

A realistic contingency demonstrates that the borrower understands this.

An appraisal where the scheme only produces an acceptable return if nothing goes wrong can make lenders uncomfortable.

A good development should have enough room to absorb some bad news.

GDV needs evidence behind it

Gross Development Value, or GDV, is one of the headline numbers in almost every residential development appraisal.

But lenders do not simply accept the developer's expected sales values.

They will rely on professional valuation and examine comparable evidence.

If twelve houses are expected to sell for £500,000 each, the lender wants to understand why £500,000 is realistic.

What has sold nearby?

How comparable were those properties?

How strong is local demand?

How quickly are similar units selling?

Is the specification appropriate for the target buyer?

A small movement in assumed sales values can materially change development profit.

For highly leveraged schemes, it can also materially change the lender's risk.

Profit on cost matters

A development can have a high GDV and still be a poor project.

What matters is the relationship between the value created and the cost required to create it.

Lenders will assess the development margin and whether sufficient profit exists to absorb adverse movements in costs or values.

Imagine two projects each producing a projected £500,000 profit.

One requires £2 million of total cost.

The other requires £8 million.

The absolute profit is identical.

The risk-adjusted economics are clearly not.

This is why development lenders look beyond the headline pound profit.

The margin needs to make sense relative to the capital and risk involved.

Leverage has to leave room for something going wrong

Development finance is often discussed in terms such as Loan to Cost and Loan to Gross Development Value.

These measures are important because they tell the lender how much of the project is being financed relative to its cost and expected completed value.

Higher leverage reduces the developer's upfront equity requirement.

It also reduces the lender's margin for error.

If GDV falls or costs increase, that buffer can disappear quickly.

There is therefore a point where maximising leverage stops improving the transaction and starts making it fragile.

Experienced developers tend to understand that distinction.

The objective is not always to obtain the largest possible facility.

It is to create enough leverage to make the developer's equity work efficiently without placing the project under unnecessary financial pressure.

The lender wants to know where the rest of the money comes from

This sounds obvious, but it can become surprisingly complicated.

Suppose total development costs are £6 million and the lender is providing £4 million.

Where is the remaining £2 million?

Is it cash?

Equity already invested in the land?

Funding from another investor?

Subordinated debt?

Has it already been spent?

And when will each source of capital enter the transaction?

A development lender wants a clear sources-and-uses picture.

Funding gaps discovered halfway through construction are considerably more difficult to solve than funding gaps identified before the project starts.

Cash flow throughout the development matters

Having enough money overall is not sufficient.

It needs to be available at the right time.

Development finance is normally drawn in stages.

Depending on the structure, the developer may need to inject some or all of their equity before lender funds are released.

Interest, professional fees, VAT and other costs also need to be considered within the cash flow.

A scheme can therefore be profitable on paper while experiencing a temporary liquidity problem during construction.

A broker should look at the timing of the capital as well as the total amount available.

The exit strategy must be credible

Every development finance lender needs to be repaid.

Usually, there are two principal routes.

The completed units are sold.

Or the completed development is refinanced onto longer-term investment finance.

Both can work.

But the lender will test the assumptions behind them.

If the exit is sales, how quickly are the units realistically expected to sell?

Is the pricing supported?

What happens if sales take six months longer?

If the exit is refinance, will the completed property generate sufficient income to support the proposed long-term borrowing?

The words "we'll refinance at completion" are not an exit strategy.

The numbers need to demonstrate that the refinance is realistically achievable.

Pre-sales can help, but they are not the whole story

Depending on the scheme, pre-sales or reservations can provide useful evidence of demand.

They may also reduce the lender's perceived sales risk.

But lenders will consider the quality of those sales.

Who are the buyers?

Are deposits meaningful?

Are contracts exchanged?

Are purchasers dependent on mortgages?

Are several units being purchased by one investor?

The quality of the evidence matters as much as the headline number of units supposedly "sold".

The borrower needs to understand the numbers

A lender can usually tell very quickly when the borrower does not understand their own appraisal.

That is a problem.

You do not necessarily need to personally produce every spreadsheet.

But if you are asking a lender to finance the development, you should understand the important numbers.

Purchase price.

Build cost.

Professional fees.

Finance costs.

Contingency.

GDV.

Profit.

Equity.

Debt.

And exit.

If costs increase by 5%, what happens?

If sales values fall by 5%, what happens?

If completion is delayed by three months, what happens?

Developers who understand those sensitivities generally have more credible conversations with lenders.

What does a development finance broker look for?

A good broker should be assessing many of the same issues before the proposal reaches a lender.

But there is an additional question:

How should this transaction be taken to market?

Not every lender should receive every deal.

A £750,000 refurbishment project belongs in a different lending market from a £25 million residential development.

A first-time developer converting a commercial property presents a different proposition from an established housebuilder purchasing its next site.

The broker should consider the scheme, leverage, borrower experience, location, asset type, loan size and exit before deciding which lenders are appropriate.

That is where market knowledge becomes important.

A broker should find the weaknesses before credit does

This is one of the most valuable parts of the process.

Suppose the cost plan is missing contingency.

Better to identify that before approaching lenders.

Suppose the proposed exit refinance does not work at current rental values.

Better to know now.

Suppose the requested leverage is above the appetite of almost every relevant lender.

That should be discussed before ten applications are made.

The purpose of a broker is not simply to package information attractively.

It is to pressure-test the transaction.

A weakness acknowledged and addressed at the beginning is considerably easier to manage than one discovered during underwriting.
Presentation matters — but substance matters more

A professionally prepared development finance proposal makes a lender's job easier.

It should clearly explain the borrower, site, planning position, development programme, costs, GDV, equity contribution, facility requirement and exit.

But presentation cannot rescue a development that fundamentally does not work.

There is no clever credit paper capable of turning insufficient equity, unrealistic values and an unexplained funding gap into a strong transaction.

Good presentation helps a lender understand a good deal.

It does not manufacture one.

What can cause development finance applications to struggle?

There is rarely one universal reason.

Common problems include unrealistic GDV assumptions, insufficient contingency, weak or unexplained experience, unresolved planning issues, aggressive leverage, incomplete cost information and an unclear exit.

Another issue is inconsistency.

If the appraisal says one thing, the valuation says another and the business plan contains different numbers again, confidence deteriorates quickly.

Development finance involves enough genuine uncertainty without creating additional uncertainty through poor information.

The strongest applications answer the difficult questions early

A lender does not expect development to be risk-free.

If it were risk-free, development returns would look very different.

What lenders want is evidence that the risks have been identified, understood and appropriately mitigated.

That means a strong application should not merely explain why the development will succeed.

It should demonstrate what happens if certain assumptions prove wrong.

That is often the difference between a promotional property proposal and a financeable development proposition.

Development finance is ultimately about confidence

Not optimism.

Confidence.

Confidence that planning is sufficient.

Confidence that the build cost is credible.

Confidence that the developer and professional team can deliver.

Confidence that enough capital exists to finish the project.

Confidence that the completed properties are worth what the appraisal assumes.

And confidence that there is a realistic route to repaying the loan.

A development finance broker should help establish whether those pieces are in place before approaching the lending market.

The lender then decides whether the return available justifies the risk of providing the capital.

At Otium Partners, we combine more than 30 years of lending and commercial finance experience with relationships across UK banks, specialist development lenders and alternative finance providers.

If you are planning a property development and want to understand how lenders are likely to view the scheme before submitting a finance application, contact Otium Partners today to discuss your development finance options.