Capital & Finance.

Lenders will also scrutinise the development appraisal in detail, stress testing assumptions on values, costs, and sales rates. Pre-sales or forward funding can significantly improve terms by reducing lender exposure to market risk.

The capital stack describes the layers of funding used to finance a development, each with different risk profiles, returns, and security positions. Understanding where each layer sits and what it costs is fundamental to structuring viable schemes.

Senior debt

Senior debt sits at the top of the security waterfall and is repaid first. It typically funds 55-65% of costs at margins of 5-8% over base rate, depending on scheme quality and developer profile. Senior lenders take first charge security and impose strict covenants and monitoring requirements.

Mezzanine finance

Mezzanine fills the gap between senior debt and equity, typically funding up to 85-90% of costs. It ranks behind senior debt in repayment priority and is priced accordingly, usually at 12-18% annualised. Mezzanine is often provided by specialist funds rather than traditional banks.

Equity

Equity represents the developer's capital at risk and takes the residual returns after debt is repaid. Equity can be the developer's own capital, high net worth investment, or institutional equity. The return required varies significantly based on the risk profile and structure of the deal.

Blended cost of capital

The overall cost of funding depends on the mix. A scheme funded 60% senior at 7%, 25% mezzanine at 15%, and 15% equity might have a blended cost of 10-11%. This must be factored into viability alongside the profit margin required by the equity provider.

Capital structures vary significantly depending on scheme size, risk profile, developer track record, and market conditions. There is no single template, but common patterns emerge across different transaction types.

Small to medium schemes (under £20m GDV)

Smaller schemes are often funded with senior debt and developer equity alone. Banks and alternative lenders provide senior facilities at 60-70% LTC, with the developer contributing the balance. Where developers lack sufficient capital, family offices or private investors may provide equity in return for a share of profits.

Medium to large schemes (£20m-100m GDV)

Larger schemes typically require more sophisticated structures. A common pattern is senior debt at 60% LTC, mezzanine at 25%, and developer equity at 15%. Alternatively, joint venture structures with institutional partners can reduce developer equity requirements in exchange for shared control and profit.

Build to rent and forward funded schemes

Forward funding removes sales risk by securing an institutional buyer before construction. The funder provides capital progressively against construction milestones, and the developer typically receives a development management fee plus a share of overage. This structure suits developers prioritising capital efficiency over absolute returns.

Strategic land

Strategic land with longer planning horizons often requires patient capital. Specialist land funds, pension schemes, and family offices provide capital for land acquisition and planning promotion over multi-year periods, typically in exchange for a share of the uplift upon consent and sale.

Lenders evaluate development proposals through a structured underwriting process, testing assumptions and identifying risks that could affect repayment. Understanding how lenders think helps developers present opportunities effectively and anticipate concerns.

Sponsor assessment

Lender confidence starts with the developer. Track record of delivering comparable schemes, financial strength to support cost overruns, and reputation for professional conduct all influence terms. First-time developers or those stretching beyond their experience base face higher scrutiny and may require additional equity or guarantees.

Scheme viability

Lenders stress test the development appraisal, typically assuming 5-10% cost increases and 5-10% value reductions to assess whether the scheme remains viable under adverse conditions. Schemes with thin margins or aggressive assumptions will attract higher pricing or be declined.

Security and exit routes

Lenders want confidence in their security position and a clear path to repayment. Sites in strong markets with multiple exit routes are more attractive than single-exit propositions. The ability to let unsold units or refinance onto investment terms provides a fallback that lenders value.

Documentation and controls

Development loans include detailed facility agreements, building contracts, professional team appointments, and monitoring arrangements. Lenders require regular reporting, typically monthly, and staged drawdowns against QS certified valuations. Borrowers should factor in the administrative burden of development finance when planning resources.

Funding errors can undermine otherwise viable schemes. Many mistakes stem from approaching finance too late, underestimating costs, or misaligning capital structures with scheme risk. Recognising common pitfalls helps developers avoid them.

Starting the process too late

Development finance takes time to arrange. From initial enquiry to drawdown typically requires 8-12 weeks, and complex structures take longer. Developers who leave funding until planning is granted often face delays or accept suboptimal terms under time pressure.

Underestimating total costs

Lenders see cost overruns regularly. Inadequate contingencies, unrealistic build programmes, and optimistic professional fee assumptions all contribute. Developers should build realistic contingencies into their appraisals from the outset rather than hoping problems will not arise.

Over-leveraging

Maximising debt reduces equity requirements but increases fragility. Highly leveraged structures leave no margin for error and can result in equity being wiped out if costs rise or values fall. The right level of leverage depends on scheme risk and market conditions.

Ignoring the mezzanine intercreditor

Where senior and mezzanine lenders are both involved, the intercreditor agreement governs their relationship. These documents are complex and can significantly affect the developer's flexibility during the project. Developers should review intercreditor terms carefully, not just headline pricing.

Failing to build lender relationships

Lenders lend to people, not just projects. Developers who only approach lenders when they need money miss the opportunity to build relationships that yield better terms and faster execution on future deals. Regular communication, even when not actively borrowing, pays dividends over time.