What Is Property Development Finance?

Property development finance is a specialised short-term funding solution designed for building and renovation projects. It covers the costs of purchasing land or property and the expenses of construction, conversion, or refurbishment. Unlike a standard mortgage, this type of finance is released in stages aligned with the project's progress.

Property Development Finance

Types of Property Development Finance

There are several types of property development finance, each tailored to different project needs and levels of risk. The most common structures include:

1. Senior Debt Development Finance

This is the primary loan for a project, typically covering 55-65% of the Gross Development Value (GDV) or 60-75% of total build costs. It is a "first-charge" loan, meaning it gets repaid first from the sale proceeds upon project completion. This is the most common form of property development finance.

2. Mezzanine Finance

Mezzanine development finance acts as a secondary loan, sitting behind the senior debt. It can be used to bridge the gap between the senior debt and the developer's own equity, reducing the initial cash deposit required. It carries more risk than senior debt and therefore has a higher interest rate.

3. Stretched Senior Finance

This is a simplified solution where a single lender provides a larger senior loan, often covering up to 75-85% of total project costs (including interest). This eliminates the need for a separate mezzanine facility.

4. Joint Venture (JV) Finance

For experienced developers with strong projects, joint venture property development finance can provide up to 100% of the funding. In this model, a developer partners with a funding provider. The developer manages the project, and the financier provides the capital; profits are then split according to a pre-agreed ratio.

5. Refurbishment & Conversion Finance

This is a specific type of property development finance for projects that involve renovating a rundown property or converting its use (e.g., an office to apartments). Loan amounts are usually based on the projected value after the works are completed (GDV).

 6. Regulated Development Finance

This is required by law when the borrower (or their immediate family) intends to live in the developed property for more than 40% of the units. It is regulated by the Financial Conduct Authority (FCA), offering borrowers specific consumer protections.