Development Finance Explained
How funding for building and refurbishment projects actually works — from GDV and loan-to-cost through to staged drawdowns, monitoring surveyors and your exit.
What Development Finance Is For
Development finance is short-term funding used to build, convert or substantially improve property. Unlike a standard mortgage, which is advanced against a property in its current state, a development facility is structured around the project itself — the land or existing building, the cost of the works, and the value the finished scheme is expected to reach.
Because the money is released against work as it is completed rather than all at once, development finance behaves quite differently from the bridging loans covered in our introduction to bridging finance. If you are weighing one route against the other, our comparison of bridging versus development finance sets out the practical differences.
The full product overview lives on our development finance page.
Ground-Up vs Refurbishment
Ground-Up Development
Building new units on cleared land or a site with an existing structure due for demolition. This is the most involved category: it usually carries the greatest planning, construction and cost risk, so lenders scrutinise the appraisal, the professional team and the developer's track record closely.
Light Refurbishment
Cosmetic and non-structural work — new kitchens and bathrooms, redecoration, rewiring — where there is no change to the footprint and no planning application required. Some lenders treat this as a form of refurbishment bridging rather than a full development facility.
Heavy Refurbishment
Structural works, extensions, changes of use or a material reconfiguration of the internal layout, often requiring planning consent or building regulations sign-off. This sits between light works and ground-up development and is generally funded on a staged basis.
GDV, Loan-to-Cost and Loan-to-GDV
Three figures drive almost every development appraisal. Gross Development Value (GDV) is the total open-market value of the finished scheme — what the completed units are expected to sell for or be valued at. Loan-to-cost (LTC) measures the loan against the total project cost, including land and build. Loan-to-GDV (LTGDV) measures the total facility against the finished value.
Lenders typically cap a facility using both measures at once — for example around 65–70% of GDV and up to 80–90% of total costs — and lend to whichever produces the lower figure.
Worked Example
- Site purchase price: £400,000
- Build and professional costs: £600,000
- Total project cost: £1,000,000
- Expected GDV on completion: £1,500,000
- A cap of 65% of GDV allows up to £975,000.
- A cap of 85% of total cost allows up to £850,000.
- The lower figure applies, so the facility is capped at £850,000, leaving the developer to fund the £150,000 balance and the land deposit.
You can sketch out short-term interest on any residual bridging element using our bridging loan calculator.
Staged Drawdowns and How Interest Is Treated
Land Tranche
An initial advance towards the purchase of the site or existing building, released on completion of the acquisition alongside the developer's own equity.
Build Tranches
The build cost is released in stages as work progresses. Each drawdown is usually signed off by a monitoring surveyor before funds are released, either in arrears against completed work or in advance against certified stages.
Interest Treatment
Interest is usually charged only on funds actually drawn, and is most often rolled up and settled at the end from the retained interest or the sale proceeds — so there are no monthly payments during the build.
Key Facts
- —Funded against the project, not just the asset
- —Sized by loan-to-cost and loan-to-GDV
- —Released in staged drawdowns
- —Interest usually charged only on funds drawn
- —Monitoring surveyor signs off stages
- —A contingency is expected in the appraisal
Monitoring Surveyors and QS Reports
On all but the smallest schemes, the lender appoints an independent monitoring surveyor — often a chartered quantity surveyor (QS) — to protect its position. Their initial report reviews the appraisal, build costs, programme, the contractor and the professional team, and comments on whether the scheme is deliverable within budget.
Once work is under way, the monitoring surveyor visits site before each drawdown and certifies the value of work completed. Lenders release funds against these certificates, which is why realistic costings at the outset matter so much: an over-optimistic appraisal tends to surface as a shortfall midway through the build.
Contingencies and Cost Overruns
Lenders expect a contingency to be built into the appraisal — commonly around 5–10% of build cost — to absorb the unforeseen. On the £600,000 build in the example above, a 7.5% contingency would set aside roughly £45,000 for the surprises that most projects encounter: ground conditions, material price movement, or an item missed at tender.
Where costs run beyond the contingency, the developer is normally expected to fund the difference. Underestimating build cost or programme is one of the most common reasons a scheme runs into difficulty, so a candid appraisal protects the borrower as much as the lender.
Planning Position
Your planning position shapes both the facility available and the price. A site with detailed (full) planning consent already in place is far more fundable than one relying on outline consent or a hoped-for permitted development route. Some lenders will consider funding a purchase before consent is granted, but usually at a lower loan amount and higher cost to reflect the risk.
Our guide to planning permission and permitted development explains the distinction in detail. You can also check the national planning guidance on the official Planning Portal and confirm title and existing charges through HM Land Registry.
Development Exit Finance
A development facility usually ends when the scheme is finished and either sold or refinanced. Where the build is complete or nearly complete but units have not yet all sold, development exit finance — a form of bridging secured against the finished scheme — can repay the development loan, remove the pressure of its term deadline and often reduce the monthly cost while sales conclude.
Where the plan is to retain and let the units, the exit is more likely to be a buy-to-let or commercial term mortgage. Either way, a clear, evidenced exit is central to getting the facility agreed in the first place.
A Typical Process Timeline
Appraisal and terms
You share the site, planning position, costed schedule of works and GDV. An indicative offer is prepared and terms are issued.
Valuation and monitoring surveyor
A valuation of the site and expected GDV is instructed, along with the monitoring surveyor's initial report on the appraisal.
Legals and completion
Solicitors report on title, security is put in place and the land tranche is released so the purchase can complete.
Staged build drawdowns
As construction progresses, the monitoring surveyor certifies each stage and the lender releases the corresponding tranche.
Practical completion and exit
On completion the units are sold or refinanced, or moved onto development exit finance while sales conclude.
Reviewed by the 3 Trees Finance team.
Information on this website is provided for general information only and does not constitute financial or legal advice.
Planning a Development?
Whether you are buying a site, funding a heavy refurbishment or arranging exit finance on a completed scheme, we can help you talk through the numbers and connect you with property finance professionals who understand development projects.
Learn more about how we select specialist brokers, or get in touch to discuss your scheme.
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Discuss Your Development Finance Requirement
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