Specialist development finance for hospitality schemes

What a development lender needs to see

Can you get development finance, and what does the lender need? Development lenders underwrite the scheme, the team and the end value, because the loan is exposed to construction risk. They want a costed schedule of works and a realistic build programme with contingency, planning consent in place or a clear route to it, a credible main contractor with a track record on comparable projects, and a defensible gross development value supported by evidence of what the finished asset will trade at. Because a hospitality scheme delivers a trading business, they also want the operating plan: the occupancy and rate a hotel will reach, or the trade a pub or restaurant will do, because the GDV and the term exit both rest on it. They size the senior loan against cost and GDV and fund the build in stages against a monitoring surveyor, so funds follow completed work. Can a first-time developer get development finance? Yes, where the scheme is sound and the team is credible, particularly with an experienced contractor and, on a hospitality asset, a proven operator, though a first-timer will carry a lower loan to cost and more equity. We package the appraisal, the programme, the team and the trading plan, and we line up the exit, so the case holds across construction and into trade.

How much you can borrow against cost and GDV

How much can you borrow with development finance, and how much deposit do you need? A senior development facility is sized on the lower of two limits: a loan to cost, indicatively up to 65 to 75 percent of the total cost including land and build, and a loan to GDV, indicatively up to 60 to 65 percent of the finished value. The developer funds the balance of the cost as equity, which is the effective deposit, typically 25 to 35 percent of cost, most of which goes in early on the land and the first stages. Can you get 100 percent development finance? Not on the senior facility alone, but a mezzanine layer behind the senior loan can lift the combined funding toward 85 to 90 percent of cost, reducing the developer's cash to the remaining slice, in exchange for a higher return on the mezzanine. The room to borrow ultimately depends on the margin in the scheme: the gap between total cost and GDV has to be wide enough to cover the finance, the profit and a contingency, or the numbers do not work. We model the cost, the GDV, the stack and the exit before approaching lenders. All bands are illustrative, vary by lender and scheme, are subject to credit approval, and are not an offer.

Rates, fees and the true cost of a development facility

Development finance is priced for the construction risk it carries, so it is dearer than a term mortgage and is charged per month or per year across the build. Expect a lender arrangement fee, indicatively around 1 to 2 percent, an exit fee on some facilities that can be a percentage of the loan or the GDV, a monitoring surveyor's cost for the staged drawdowns, a valuation reporting on both cost and GDV, and legal costs for both sides. Because interest is usually rolled up, the length of the build drives the total cost, so a well-run programme that completes on time saves real money, while an overrun compounds the interest and can eat the profit. The true cost is the all-in figure across the whole facility, not the headline rate, and it has to be set against the profit the scheme delivers. We model the full cost of the stack against the appraisal, disclose our broker fee in writing, and never claim an exclusive tie to any lender. The figures are indicative and not an offer of finance.

Development finance against a bridging loan

What is the difference between development finance and a bridging loan? A bridging loan is value-led short-term money against an existing, largely finished property, drawn as a single advance and repaid by a refinance or sale; it suits a purchase or a light refurbishment where the building stays fundamentally as it is. Development finance is cost-led and staged, drawn in tranches against a monitoring surveyor as a scheme is built or substantially rebuilt, and it suits ground-up construction, conversion and heavy refurbishment where the works carry real construction risk. The heavier and more structural the works, the more a facility resembles development finance rather than a bridge. At the end of a development, the scheme often moves onto a development exit bridge or straight onto a term investment mortgage sized on the trade the finished hospitality asset produces, which is the take-out that repays the development debt. We place a scheme on the spectrum from bridge to full development and structure the debt to match, so the works are funded on the right money and exit cleanly.