20 key steps, important terminology and metrics to secure development finance for your UK property development project. A useful development finance guide by Blueray Capital.

1. A guide to the steps and important
A guide to the steps and important
terminology to successfully obtain
terminology to successfully obtain
property development finance
property development finance
Property Development
Finance Guide
www.blueraycapital.co.uk
www.blueraycapital.co.uk

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20 Steps to Development Finance Success
Introduction
The UK property market is a massive and important economic sector with a total value of £8.1tn at the end of 2020
according to IPF Research. Their estimates the value of the
residential property sector at £7.2tn is almost 8 times the value of the commercial property sector at £918bn. In the
commercial sector retail, o ce and industrial are similar sizes with commercial now being the largest due to a near
20% decline in the retail sector over recent years.
Size and Structure of the UK Property Market report
Every single property starts with the vision of a developer and will require, among other things, development nance.
Funding a development usually requires a combination of investor equity and debt over the entire life cycle of the
development from initial purchase of land or property to the completion of the eventual sale of the property or nal
unit.
In the UK there is a sophisticated property development marketplace with many players: planners, architects,
surveyors, construction rms, sub-contractors, material providers, support services, advisers, investors and principal
lenders.
This guide is designed to help those who are considering a development loan to fund a single development or
refurbishment to larger, more complex schemes.
Although there are some di erences between the commercial and residential sectors, which are mainly to do with
lender appetite and criteria, this guide applies to both.
The guide is not meant to be de nitive. It includes the main steps and important terminology to successfully obtain
property development nance in the UK.

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1. Types of development
Property development can be segmented into two categories.
Within these segments the development nance challenge could relate to a single unit or a scheme. The latter could
be a multi-unit development within a single property such as a block of ats or HMO, or a housing development of 2-3
luxury dwellings by a private developer to the creation of hundreds of homes by a major house builder.
where a new build property is constructed on vacant land, or
Groundup development
(commonly referred to as refurb) where an existing property is upgraded or re-purposed.
Refurbishment
Refurb may be light or heavy. The latter involves structural changes whereas the former consists of changes to
xtures, ttings and decorative condition.
2. Criteria
The criteria applied by lenders to a property development project or scheme that will be deemed acceptable to their
credit underwriting process are many and varied. They include geography, property type, location, minimum and
maximum value, developed value, build cost, liquidity and developer experience.
There are many reasons for a lender not to consider your project. They may exclude blocks of ats (or those above a
certain size), HMOs (homes of multiple occupancy) (or those above a certain size), student accommodation (or those
outside speci c cities), care homes, pubs, hotels, farms etc.
In short, the better the quality of the scheme and the more experienced the principals involved, the more interesting it
will be to development lenders.
3. Exit strategy
Equally important to the lender is the strength and certainty of the exit route or re- nance plan. This typically takes
the form of the sale of the units themselves or a BTL mortgage or other re- nance option on the completed asset. The
lender will require comfort on the likelihood of the re- nance being delivered at the quantum required and, in the
timescale agreed. If it’s a BTL mortgage then a decision in principle (DiP) from the lender is normally required. If it’s
sale of the units then the lender will factor in up to 50% of the build time for the marketing process.

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4. Security
Most development lenders look for an unencumbered property on which they will take a 1 charge for the extent of
the development life cycle.
st
5. Loan term
The majority of development nance lenders will lend up to 24 months although the timing is dictated by the
development plan. A small, refurb project for an investment property aimed for the BTL market may be a 3 month
term with a more complex heavy refurb or ground up development being over 18 months with 12 months build and 6
months marketing.
6. Key metrics
LTV
determines the gross loan amount the lender will consider based on the assessed value of the property.
Borrowers usually want to borrow as much as possible on the strength of the asset value but lenders have strict
minimum and maximum guidelines, normally in the 60% to 75% LTV range. LTVs for commercial properties are usually
lower than residential (and interest rates are higher).
Loantovalue
LTC
is the amount that the lender will contribute to the total build/refurb cost of the scheme. This could be
between 75% and 90% with some lenders considering funding the entire build cost which usually involves a higher rate
or a share of developer pro t. The majority of funders won’t fund the entire structure.
Loantocost
LTGDV
is the amount the lender will commit compared to the nal value of the refurbished
property or completed schemes when all units are sold. LTGDV ratios are usually in the 60% to 85% range.
Loantogross developmentvalue
In each of the above the valuation report determines the values, not the developers estimates and for sizeable
schemes a development appraisal should be submitted (see below)

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8. Interest rate
The rate charged is normally expressed as an annual % rate as most development loans are repaid on a rolled-up
interest basis. At the end of the term, or on completion of the project if earlier, the borrower pays back the principal +
total applicable interest + fees. Interest rates are in the 6% to 10% range.
9. Arrangement fee
A development nance lender makes its return on the margin of interest received over its cost of capital. It covers
some of its application process costs through an arrangement fee, normally 1% to 2% of the gross loan amount. This
fee is deducted from the gross loan amount and usually shared with the commercial nance adviser, or broker, who
has introduced the transaction and supported the client through the process.
10. Exit Fee
At the end of the process there is normally an exit fee, usually 1% to 2%, which is deducted from the gross loan
amount and forms part of the redemption statement. A shorthand for the 3 main cost elements of a development
nance facility is: “2% In , 8%, 1% Out”, meaning 8% interest rate applying over the term with a 2% arrangement fee and
a 1% exit fee.
11. Other costs
Development nance lenders have di erent pricing policies but other costs typically include:
Administration/Commitment/Acceptance fee
Monitoring fee
Early repayment charge, or ERC. Usually expressed as a minimum term. Given the complexities of development it is
more likely that more time is needed than less!
Surveyor fee, the borrower pays for the valuation report directly to the surveyor rm
Legal costs, the borrower pays for the lender’s legal costs
During the turbulence of the last 2 years lender valuation requirements have adapted to accommodate travel
restrictions and the shift to working from home. The preferred option is a valuation report by a RICS quali ed surveyor.
This involves a property visit, measurements & photographs resulting in a detailed report on the asset, its rental
income potential and local sales comparisons to establish developed values. Lenders use a panel of surveyors usually
o ering 3 choices to the borrower who will need to pay the survey cost prior to instruction. Some lenders have begun
to use desktop valuations and automated valuation models, especially for lower value assets or speci c types of
property. There can be surprises in the valuation outcome and so borrowers are advised to incorporate conservative
values in their plans.
7. Valuation

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13. Net loan
The net loan, often referred to as Day 1 proceeds, or the draw down amount, is the facility available to the borrower on
completion of the legal documentation. It is not paid out to the borrower, rather deployed monthly in line with the
progress of the build program. The net loan is the gross loan less all the deductions which include the arrangement
fee, monitoring fee and the retained interest for the full term.
14. Decision in Principle
A DiP, Quotation or Term Sheet details all the costs and terms of the development nance lender. Once accepted by
the borrower, the surveyor is instructed to produce the valuation report, nal credit sanction is obtained and the legal
process started.
15. Know your client
KYC is a security process all lenders are required to complete for fraud prevention purposes. By gathering full
identi cation details and completing various credit checks they can ensure the borrower is legitimate with su cient
credit status and not on any sanctions list. Some lenders are moving to electronic systems which are online and
automated while others require certi ed copies of a driving licence or passport and a recent utility bill. The process is
normally completed after the valuation report once a credit-backed nal o er is received, and the legal process is
underway.
16. Experience
All lenders want to minimise their risk of default which is why the operate within speci c lending criteria and closely
review each application. Most lenders prefer to lend to experienced developers and property professionals. Some
lenders will consider rst-time developers. For the inexperienced developer the key is to start small, maybe a modest
BTL refurb. Even with 1 or 2 projects under one’s belt, an application for £5m to support a 60 unit ground up
development will not gain traction if the applicant’s prior experience includes a £250k refurb of a BTL property and a
£1m development of a detached dwelling.
All costs are detailed on the development nance quote, indicative o er or term sheet before proceeding to the
valuation and legal stage. At this point in the process there may be a small, but non-refundable, commitment or
acceptance fee which is deducted from the administration fee on completion.
The gross loan is the amount the borrower will need to repay at the end of the term. It is derived from the property
value (as con rmed in the valuation report) taking into account the lender’s LTGDV and LTC policies.
12. Gross Loan

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17. Development appraisal
This is a detailed document containing all the elements of the proposed scheme. For larger, more complex schemes
lenders will not consider an application without an appraisal. It will include full property details and costs,
development values, build costs, timetable, exit plan, comparable valuations and team bios. The quality of the
appraisal can often mean the di erence between lender acceptance and decline.
18. Monthly valuations
Once the development loan application is approved and legals are completed the developer may begin accessing
the facility. A monitoring surveyor (MS) will have been appointed whose role is to validate the deployment of the
facility to the contractor involved. This is done on a monthly basis via a site visit and meeting where progress is
agreed. The MS will notify the lender via a report and a draw down will be sanctioned which will enable the contractor
to be paid.
It is important to note that VAT is not funded by the lender facility. VAT costs are usually reclaimed by the developer,
but su cient cash ow needs to be allowed for in the build program to ensure this process is covered adequately.
19. Redemption statement
To settle the development loan obligation the borrower will need to activate the designated exit route as described
above so that the required funds are available to repay the gross loan amount. At this point the lender will create a
redemption account showing any additional costs (exit fee/penalties) or reimbursements (refund of retained interest).
Once the lender is fully satis ed the loan is settled, the charge on the property may be released. Note it is prudent for
the borrower to con rm release of the legal charge.
20. Timescales
Development lenders compete across all the lending criteria and time to complete is one of the important
di erentiators. Due to the sequential nature of the process (enquiry-quote-valuation- nal o er-legals) and the number
of rms involved (lender, surveyor, solicitor, borrower and borrower’s solicitor) the process normally takes between 4-6
weeks. Smaller refurb projects will complete in less time.

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1. We have relationships with all the leading development lenders. We know their lending criteria and application
process requirements and provide prompt response on appetite and indicative terms.
2. We make the process easier for the lender and they trust us. Applications introduced by advisers have greater
chance of success than a direct approach. We will have done due diligence on the client, established the
transaction is robust, prepared relevant information and will present it in a lender-friendly format.
3. For good quality deals it’s likely that multiple lenders will express interest which provides the client with more
choice and potentially enhanced terms. A key adviser role is to establish lender appetite quickly and help
achieve optimum terms.
4. Our fees are paid by the lender as part of their arrangement fee and so our service does not represent an
additional cost to the borrower.
The development nance process usually starts with a conversation with Blueray Capital. We can e ciently assess
the options available and usually provide illustrative terms in minutes. We will then work with you exclusively to
submit the application to selected development nance partners and guide you through the process to a successful
and prompt completion.
Whyuseadevelopment nanceadviser?
As outlined in this guide, there are numerous aspects to development nance and navigating them e ectively will
increase your chances of success with development lenders. There are good reasons to use a specialist advisory rm,
such as Blueray Capital, to achieve this success:
Email: enquiries@blueraycapital.co.uk
Call: 0203 393 8864
Visit: www.blueraycapital.co.uk