Development finance has become an increasingly broad market, with a growing number of lenders willing to support residential and mixed-use schemes and, as development viability has tightened over recent years, the funding market is becoming more competitive. Yet, despite the wider choice, developers continue to encounter avoidable funding issues which add unnecessary cost, delay projects or reduce scheme profitability. In many cases, the problem that developers face isn’t simply securing finance, it’s usually choosing the wrong lender, inappropriate structuring, or overlooking key terms within the facility.
Mistake #1 – Focusing on the interest rate instead of the overall facility
When first comparing development finance facilities, it’s fairly natural to start with the headline rate. After all, interest is one of the largest costs on most debt-funded schemes, so understanding the cost of borrowing is an obvious place to start. However, the monthly interest rate is only one variable in the context of the wider facility, so much so that two facilities with identical leverage and headline interest rate may produce materially different outcomes because of other terms or how each facility is structured.
The value of a competitive headline rate is diminished if the lender can’t move at the pace that a project demands. Slow underwriting and decision processes, repeated credit referrals, or delays in reaching a formal offer can be acquisitions and build programmes under pressure and at risk.
The commercial approach of each lender will also vary. Some lenders are comfortable with mixed-use developments, phased projects or schemes with complex planning history, whereas others may decline applications that fall outside of their usual lending criteria.
Flexibility is also another key factor. Development projects are known to rarely following the original programme perfectly. A lender who is willing to agree unit releases, accommodate minor extensions or flex the exit strategy could be far more valuable to some developers than a marginally lower interest rate.
Clearly interest is only one part of the overall facility, and developers would need to factor in the total cost of borrowing including arrangement fees, monitoring surveyor costs, legal fees, exit fees, and any other charges when comparing terms.
Mistake #2 – Assuming going direct to a lender is a better option
Many developers continue to approach the same lender or bank that they’ve used for years, or the lender they used on their last project. However, lender appetite and criteria evolves constantly and, whilst a lender may well offer terms, the lenders internal view of a new project may quietly result in a higher rate than what might be available in the wider market.
Other developers may search for development finance lenders and approach some directly. The problem is, with hundreds of development finance lenders in the marketplace, developers don’t truly know if they are getting the best possible terms that might be available to them. By going direct to a lender they may get offered terms that they can live with, but are they leaving profit on the table or committing to inflexibility in doing so?
While longstanding relationships do have value in the property world, they can also narrow the range of funding options available to developers. As lenders typically charge the same arrangement fees regardless of whether a broker is involved or not, using a specialist development finance broker to help identify all available options in the market, compare structures, lender appetite, and commercial terms available can often provide access to a wider range of options and better terms than going directly to a lender.
Mistake #3 – Underestimating cash flow
All good developers know that cashflow is king. Of course, development appraisals are primarily built around costs and GDV, but they are delivered through cashflow. Whilst a scheme can remain profitable on paper, if money isn’t available at the right time it can come under pressure, cause unnecessary stress, and eat into margins unnecessarily. Many development appraisals can demonstrate that a scheme is profitable after the last unit is sold, however far fewer can demonstrate that a project will remain liquid throughout the entire build.
Even where the overall facility is sufficient, slow drawdown processes after a monitoring surveyor visit could delay progress on site and add unnecessary time to the construction programme. Release of funds can be delayed if monitoring surveyors are slow to inspect, raise valuation queries or require outstanding information, while building contractors or subcontractors all still expect to be paid on time.
The interest structure can also have a significant impact on a project’s liquidity. Rolled-up interest is more likely to preserve working capital during the build, whereas retained interest is more predictable but requires more careful modelling to ensure there are sufficient funds available throughout the entire programme. Understanding how interest servicing impacts cashflow and ensuring this is reflected in cashflow forecasts is just as important as key headline terms.
Successful developments don’t often rely on a basic spreadsheet of costs, but require detailed cashflow forecasts mapping the expected drawdowns, contractor valuations, professional fees, and projected sales receipts to see where bottlenecks and pressure points are. Successful developments also analyse sensitivity around sales timing, which is one of the most crucial points of a scheme due to being the highest point of interest being accrued due to the build being complete, yet the most challenging to control due to external market conditions.
Mistake #4 – Treating exit strategy as a formality
“We’ll sell the units” isn’t a robust exit strategy and will rarely attract the best finance terms or lenders. Furthermore, the detail around the exit strategy may influence which lender is most appropriate for a particular project.
Selling completed units is one part of the process, but lenders can vary significantly in flexibility around finer details of a strategy. Unit release provisions, partial redemptions, loan extension options and the ability for the developer to retain completed units as investments could all influence how easily a project reaches a full exit. Whilst these nuances rarely receive the same attention as interest rates or LTV leverage, they can become far more important later if sales are slow or if the original plan changes due to market conditions.
A well-structured facility and the appropriate lender should support the exit strategy, not dictate it. Developers who consider these details in the terms at the outset are often better placed to adapt later if market conditions, buyer demand or long-term investment plans change during the project.
The best exit strategy isn’t always the one with the highest projected GDV, it’s sometimes the one that is still achievable through flexibility if the project finishes late, or if sales take longer than expected.
Mistake #5 – Treating finance as something to arrange after finding the site
Too often finance is treated as the final step in the acquisition process, well beyond the site being identified and a price being agreed based on a simple development appraisal. In reality though, the availability and structure of development finance can influence everything within the development model – from the price being paid for the site, to the amount of equity required from investors, and the projects expected return.
Earlier stage engagement with funding options allows developers to test their assumptions before they become agreed terms or, worse still, binding commitments. Understanding the likely leverage and lender appetite for a scheme, as well as the security requirements and borrowing costs can help to shape negotiations with a landowner or agent, strengthen the decisions around the acquisition and identify potential issues before exchanging on a site. Finance should ultimately be integrated into the viability of a scheme from the outset, rather than trying to make the numbers work later.
For many developers, that early assessment is where a specialist development finance broker can add the greatest value to their project. Instead of simply sourcing a lender once a deal has been agreed, an experienced broker can work with the developer to help assess funding options, likely leverage and lender appetite while the acquisition is still being evaluated.
