How does development finance work?
Development finance is short-term, staged funding for building or substantially refurbishing property. It is not a mortgage: where a commercial mortgage lends a
Key takeaways
- Development finance is a staged loan that funds a build as it happens: an advance against the land on day one, then construction drawn down in arrears against certified progress.
- Interest is usually rolled up into the facility rather than paid monthly, and the whole loan is repaid at the end from a sale or a refinance onto investment debt.
- Senior facilities commonly run to around 65 to 75 percent of total project cost; pricing is indicative from roughly 8 percent a year plus arrangement and exit fees, subject to scheme and profile.
- A monitoring surveyor inspects and signs off each drawdown, so a credible cost plan, programme and contractor speed both approval and every release that follows.
Development finance is short-term, staged funding for building or substantially refurbishing property. It is not a mortgage: where a commercial mortgage lends a fixed sum against a finished, income-producing asset, development finance funds a project that does not yet exist, releasing money in stages as the building goes up and the value rises with it. That structure is what makes it suitable for an industrial scheme, and it is why the loan behaves so differently from term debt.
This guide explains how development finance works step by step: the day-one land advance, the staged construction drawdowns, rolled-up interest, the monitoring surveyor, how much you can borrow, what it costs, the typical term, and how the loan is repaid at the end. We arrange development finance for industrial and logistics schemes as a broker and introducer across a panel of lenders; we are not a lender, and nothing here is financial, tax or legal advice. Lending figures are indicative and vary by scheme, leverage and borrower experience.
How does development finance work, step by step?
Development finance is built around the cashflow of a build. Rather than handing over one lump sum, the lender commits a total facility and releases it in stages: a first advance against the land or existing building, then a series of construction drawdowns paid in arrears as work is completed and certified. The borrower funds the gap with their own equity, usually concentrated at the start, and interest accrues only on money actually drawn, which keeps the cost down in the early months when little has been released.
Day-one land advance
The lender advances a portion of the land or existing-asset cost, commonly up to around half to two thirds of value, with the borrower's equity making up the rest.
Staged construction drawdowns
Build costs are released in arrears against certified progress, so the lender funds work already done rather than work promised.
Monitoring and certification
A monitoring surveyor inspects the site before each drawdown and certifies the value of completed work against the cost plan and programme.
Rolled-up interest
Interest and fees accrue into the facility through the build rather than being paid monthly, so the scheme is not drained of cash before it earns.
Exit
On practical completion the whole loan plus rolled-up interest is repaid from a sale or a refinance onto longer-term investment debt.
The arithmetic of the two-part structure rewards the borrower. Because the land advance and each construction stage are drawn separately and interest runs only on the drawn balance, a scheme that takes nine months to build does not pay nine months of interest on the full facility. This is the central efficiency of development finance, and it is why a build is funded this way rather than with a single drawdown that would charge interest on idle money.
How much can you borrow with development finance?
Lenders size development finance against two measures: the total project cost and the gross development value, the GDV, which is what the finished scheme is worth. Senior facilities for industrial schemes commonly run to around 65 to 75 percent of total project cost, and are also capped at a percentage of GDV, typically in the region of 60 to 70 percent. The lower of the two limits sets the loan, and the borrower funds the balance as equity, usually weighted to the front of the project.
True 100 percent development finance is rare and never free. A scheme can sometimes be funded with little or no cash deposit by adding a stretch senior or mezzanine layer above the senior loan, or by pledging additional security, but the price is higher and the lender still expects the borrower to have real money and experience in the deal. The honest position is that lenders fund credible developers, not deposits, and a borrower bringing no equity and no track record will struggle whatever the marketing promises. Our development finance calculator lets you test facility sizes against your own appraisal.
Experience moves every number. A developer with a record of delivering similar schemes borrows at higher leverage and finer pricing than a first-timer, who usually achieves better terms by pairing with an experienced contractor or project manager on a design and build contract. The cost plan, the programme and any pre-let or pre-sale evidence then fine-tune the facility from there.
What does development finance cost?
Development finance carries a higher headline rate than term debt because the lender is funding an unbuilt asset over a short window with construction risk attached. Indicative pricing for an industrial scheme starts from roughly 8 percent a year, charged on the drawn balance, with the interest usually rolled up rather than paid monthly. On top of the rate sit an arrangement fee, commonly 1 to 2 percent of the facility, and an exit fee, charged at the end on the loan or sometimes on GDV, which the appraisal must carry from the outset.
The compensation for the higher rate is that the borrower is not paying out of pocket through the build. Rolled-up interest means the scheme is not starved of cash while it earns nothing, and the cost is only crystallised at exit when the asset is sold or refinanced. For a fuller breakdown of the build costs the finance has to cover, our guide on industrial unit construction costs sets out the cost plan side, and our development finance page covers structures in more detail.
What is the role of the monitoring surveyor?
On all but the smallest facilities the lender appoints an independent monitoring surveyor, sometimes called a project monitor or IMS, to be its eyes on the site. Before the facility completes the monitoring surveyor reviews the appraisal, the cost plan, the build contract and the programme, and flags anything that looks thin, such as a contingency that is too low or provisional sums hiding parts of the price that are not really fixed. A clean report at this stage speeds credit approval.
Through the build the monitoring surveyor inspects the site before each drawdown and certifies the value of work actually completed, so the lender funds progress rather than promises. They also track the programme, the spend against budget and the remaining cost to complete, and will not certify a drawdown that would leave the facility unable to finish the scheme. This is a protection for the borrower as much as the lender, because it catches a budget drifting off course before it becomes a stalled site.
The monitoring surveyor is the reason a tidy cost plan and a credible contractor matter so much: they are checked at the start and at every drawdown, and a thin case is found at the worst possible moment.
How is development finance repaid?
Development finance is short-term money with a built-in exit, repaid in one go at the end rather than amortised over years. The two standard exits are a sale of the finished scheme, where the loan and rolled-up interest are cleared from the proceeds, and a refinance onto longer-term investment debt once the building is let, where a commercial mortgage takes out the development facility and the developer holds the asset for income. Many industrial developers build to hold, refinancing onto term debt and keeping the let estate.
Because the exit repays the whole loan, lenders underwrite it as hard as the build. They will test the assumed sale values or rents against real local evidence, check that a refinance onto term debt would actually pass its own cover test at the projected rent, and stress the figures for a softer market and a longer programme. A scheme whose only viable exit is a top-of-the-market sale is a fragile one, and we encourage clients to evidence a refinance exit as well as a sale before drawing down.
Where a build completes but the sale or refinance is not yet ready, a development exit or short bridging facility can carry the asset over the gap, which is one of the routes we cover in our comparison of bridging versus development finance. Most development lending to companies is unregulated; where a loan would be secured on a borrower's home or otherwise falls within FCA regulation, different rules apply and we say so at the outset.
How Does Development Finance Work?: common questions
How does development finance work?
Development finance is a staged loan that funds a build as it happens. The lender advances a portion of the land cost on day one, then releases construction funds in arrears against certified progress, with a monitoring surveyor signing off each drawdown. Interest usually rolls up into the facility rather than being paid monthly, and the whole loan plus interest is repaid at the end from a sale or a refinance onto investment debt. Senior facilities commonly run to around 65 to 75 percent of total project cost at indicative rates from roughly 8 percent a year.
How much deposit do I need for development finance?
Most senior development facilities cover around 65 to 75 percent of total project cost, so the borrower funds the remaining 25 to 35 percent as equity, usually weighted to the front of the scheme. The deposit can be reduced with a mezzanine or stretch layer or additional security, but never to nothing for a borrower without real cash and experience in the deal. Lenders fund credible developers, not empty deposits, so the practical minimum depends as much on track record as on the headline percentage.
How to get 100% development finance?
True 100 percent development finance, with no borrower cash at all, is rare and expensive, achieved only by adding a mezzanine or stretch layer above the senior loan or by pledging extra security, and only for experienced developers with a strong scheme. Even then lenders expect real equity or value in the deal somewhere. A borrower with no money and no track record should treat any promise of free 100 percent funding with caution. It is usually better to size the senior facility correctly and fill any genuine gap with priced mezzanine.
How long does it take to get development finance?
From a complete application a senior development facility commonly takes a few weeks to a couple of months to reach completion, because the lender must value the site, appoint and receive a report from a monitoring surveyor, and complete legal due diligence on the security and the build contract. A clean, well-evidenced case with planning consent in place, a fixed-price contract and a credible contractor moves faster; a case with gaps in the cost plan or unresolved planning takes longer. The first drawdown follows completion.
Ready to talk about a real deal?
Send us the deal and we will come back with a view on fundability and likely terms within one working day.