Ground-Up Development Finance

Ground-up development finance funds the construction of new buildings on cleared or undeveloped land — as distinct from refurbishment, conversion, or extension of existing structures. It is the most complex form of property development finance because it starts with no income-generating asset and ends with a completed, unsold development. The lender’s exposure increases throughout the build before the exit event.

How Ground-Up Development Finance Works

The facility covers two elements:

1. Land cost — either purchased before finance is arranged, or acquired as part of a combined land and build facility. Land is often funded at a lower LTV than the overall scheme.

2. Build cost — drawn down in stages as construction progresses, certified by a monitoring surveyor.

At the outset, the developer typically brings:
– The land (owned or being purchased)
– A planning permission or at least a planning application in progress
– A development appraisal showing projected costs and GDV
– A contractor in place (or selected)
– Equity contribution (typically 20–35% of total project cost) [VERIFY current equity requirements]

The lender advances the remainder in staged drawdowns — triggered by the monitoring surveyor certifying completion of each phase.

Key Metrics Lenders Use

Loan to Cost (LTC): the loan as a percentage of the total project cost (land + build + costs). Most ground-up lenders advance up to 70–75% LTC. Higher LTC (up to 85–90%) is available through mezzanine finance alongside senior debt. [VERIFY current market norms]

Loan to GDV: the loan as a percentage of the projected Gross Development Value (the expected completed value). Lenders typically cap exposure at 55–65% of GDV on a senior-only basis. [VERIFY current market norms]

These two metrics work together: a scheme with lower build costs relative to GDV (better margin) can support higher LTC without breaching the GDV cap.

Developer Equity

Most senior ground-up lenders require the developer to contribute 20–30% of total project costs from their own funds. [VERIFY current equity requirements — these vary with lender, deal size, and developer track record]

Equity can be supplemented by mezzanine finance or equity investment, but layering in additional capital increases the overall funding cost and complexity.

The Drawdown Process

Funds are not advanced as a lump sum. The typical drawdown process:

1. Day one advance covers land (if not already owned) and initial mobilisation costs
2. Subsequent advances are requested at agreed construction stages
3. The developer submits a drawdown request with supporting cost evidence
4. The monitoring surveyor inspects and certifies the work completed
5. The lender releases the next tranche — typically within 5–10 working days of certification [VERIFY current timelines]

Interest rolls up on drawn amounts during the build. The facility is repaid — with all accrued interest — at completion, typically via sale of units or refinance onto a term mortgage.

Costs

Ground-up development finance is priced at higher rates than bridging or commercial mortgages, reflecting the construction risk and drawn-down nature of the facility. Typical monthly rates: 0.85–1.5% per month, with arrangement fees of 1–2% and sometimes an exit fee of 1%. [VERIFY current rate ranges — market conditions affect pricing significantly]

See: Development Finance Costs Explained for a full breakdown.

Track Record and Lender Appetite

First-time developers face significant barriers to ground-up development finance. Most specialist lenders require at least one completed comparable scheme and typically want to see the developer’s CV including previous projects, contractors used, and sell-through performance. [VERIFY current lender policies — track record requirements vary]

Experienced developers with multiple completions can access better rates, higher LTC ratios, and more flexible underwriting.

Planning Permission

Planning is usually a condition of development finance. Lenders generally require:
– Full planning permission granted (or at minimum, resolution to grant), not outline permission only
– No planning conditions that prevent commencement
– Community Infrastructure Levy (CIL) and other obligations calculated and factored into appraisal

Some lenders will advance against land under offer or with outline permission at lower LTV, bridging to full planning — but this is a more complex and expensive arrangement. [VERIFY]

Exit Strategy

The primary exit routes for ground-up development finance are:

• Sale of completed units — the most common route for residential development
• Refinance — onto a buy-to-let or commercial investment mortgage on completion (for retained schemes)
• Development exit finance — a short-term bridge between practical completion and full sell-through, used when units are not all sold by the time the development loan matures

Lenders assess the credibility of the exit at underwriting. A scheme with strong local comparable sales, a presale or forward sale on some units, or an established developer’s relationship with agents strengthens the exit case. [EDITORIAL JUDGEMENT]

Related Pages

• Refurbishment Finance
• Development Finance Costs Explained
• Mezzanine Finance
• Gross Development Value (GDV) Explained
• Loan to Cost (LTC) Explained
• Best Development Finance Lenders UK