Glossary of Terms in Development Finance

A

The fee charged by the lender and/or the broker when you apply for a loan. Normally Heads of Terms (HoTs) would have been issued but will not be credit-approved at this stage. The lender should have discussed the case with the Credit Committee before issuing HoTs to gain initial feedback. A lot of work goes into preparing and underwriting Property Development Finance, so a fee on application is standard, but make sure you’re dealing with reputable Lenders and Brokers before you hand it over.

Project costs or Estate Agent fees. These costs can be considered towards the overall Land Costs or Build Costs, and so can count towards the Client Equity contribution. Rules differ from Lender to Lender, so check with your Broker.

The designer of your building and potentially your construction supervisor.

B

The slack built into the Build Cost to allow for Cost Overruns. The industry standard is to add 5% to the Build Budget, but some Lenders will want up to 10%. This is 100% covered within the Build Loan, before the residual debt is applied to the Land Loan.

The cost of developing a property from start to finish. It should be shown separately to the Land Cost, and should include all Planning Costs, S106 & CIL, Warranties, Contingency, Structural Works, First Fix costs, Second Fix costs, Landscaping and Finishing / Dressing Costs.

The part of the loan that covers the Build Costs, fully funded by the Lender, along with their own fees and Retained Interest. The residual loan is used against the land.

The time within the Loan Term allocated to building the site. When the Land Loan completes, the Build Loan will be drawn on a Stage Release Payment basis to pay the Contracted Construction Costs. The Build Loan normally draws down within 1 or 2 months following completion of the land acquisition. After the Build Loan is fully drawn and the works are complete, the remaining Loan Term (or Sales Period) allows time for the end units to be sold. The Build Term plus the Sales Period equals the Loan Term of a Development Loan.

C

When you spend money on acquiring or maintaining an asset, in order to enhance its value, or add value to the business due to the acquisition of that asset.

The structure of your development finance, or the different layers that fund a scheme. The typical stack has three layers, and normally includes Senior Debt, Mezzanine Debt and Equity. Strategically determining the best capital stack for a development helps minimise equity investment and maximise profit.

The inflows and outflows of cash within a business, required to project the Build Budget / Build Costs over the Build Term. The Cashflow or S-Curve is really important because when you require a loan to fund the build, and when you believe you will sell the properties directly affects how much you borrow and when, which in turn directly affects your profit. Lenders often assume equal draws on the Build Loan across the Build Term; e.g. if you have a Build Loan of £2m, and a 10-month Build Term, the Lender assumes £200k will be drawn every month for the Build Term. This is unrealistic and skews the cost of the funding. Providing accurately forecasted cashflow from the start, and maintaining it through the build, will help you to monitor and hopefully reduce your funding costs.

The inflows and outflows of cash within a business, required to project the Build Budget / Build Costs over the Build Term. The Cashflow or S-Curve is really important because when you require a loan to fund the build, and when you believe you will sell the properties directly affects how much you borrow and when, which in turn directly affects your profit. Lenders often assume equal draws on the Build Loan across the Build Term; e.g. if you have a Build Loan of £2m, and a 10-month Build Term, the Lender assumes £200k will be drawn every month for the Build Term. This is unrealistic and skews the cost of the funding. Providing accurately forecasted cashflow from the start, and maintaining it through the build, will help you to monitor and hopefully reduce your funding costs.

The capital you as the borrower need to put in to complete the purchase of an Asset or the Development of a site. Essentially; Total Costs minus Total Net Loan.

The Quantity Surveyor hired by you as the Borrower, to monitor the development on your behalf. The cost of the QS is accepted by most Lenders as a legitimate Build Cost, and can be included towards the Total Costs of the project when applying for Development Finance.

When a large Development Finance Loan or Commercial Mortgage is co-funded by several Lenders. There is usually a Lead Lender, responsible for documentation and underwriting, who invites other banks to partner on the loan. Normally it is executed as one charge on a Pari Passus basis, with each Lender’s interest taken into account, rather than through Sub-Participation.

The Pay Rate of a loan; i.e. The Cost of Funds plus the Lender Margin equals the Total Rate that applies to the Loan.

The charge levied by local authorities on new developments to help fund surrounding infrastructure, facilities or services, such as schools or improved transport links, which may be required to support new homes and businesses in the locale.

See Build Contingency.

The contract value for the building works, as agreed by the Developer and Builder.

The underlying cost to the Lender of funding a Loan. The Lender Margin is added to give the Pay Rate of the Loan. The Cost of Funds varies between Lenders and from Loan to Loan. Base Rate is most commonly used for Residential Mortgages. Development Finance is most commonly funded using Libor.

Where the actual Build Costs exceed the projected Build Costs. When Lenders request Personal Corporate Guarantees, it could be a percentage of the Build Costs or Total Loan Costs, or just to guarantee the cost overruns.

When a loan offer has been made, following a full assessment of your case and property asset.

Usually consists of senior management, senior Underwriters and stakeholders ,who discuss the case and vote on loan approval.

D

The removal of substances from a site that could be harmful to human health (such as Asbestos), before a development project begins.

The clearing of a site before building works begin. This is recognised by most Lenders as a legitimate Build Cost, and can be included towards the Total Costs of the project when applying for Development Finance.

Your relevant skills, professional qualifications and previous development history. It normally takes three relevant schemes to be classed as ‘experienced’. Most Lenders appreciate that previous projects might be smaller in size and value as you build up to bigger schemes, but relevance is key. If you’ve done a loft conversion or split a house into two flats, it doesn’t automatically mean you’ll secure funding to build 20 new-build houses.

Funding provided to specifically finance a development project. Lenders mainly look at LTC and LTGDV when you apply for a loan, to assess how much they will lend and on what terms. For a full guide on Calculating Development Finance, click here.

See Development Finance.

The costs incurred in finishing a property to a standard that allows a buyer to move in straightaway. Mainly includes furniture and soft furnishings, such as curtains, sofas, cushions, bedding, coffee tables etc.

E

A charge you will incur as a Borrower if you exit a loan before the end of a specified term.

Describes the end use of a property; Residential Property, Commercial Property, Mixed Use, etc.

Where the buyer or owner of an Asset funds part or all of the Deposit / Equity via a Loan from another party. In return, the Lender normally charges an Interest Coupon and a Profit Share.

We have created the EAIR to offer clarity on the true cost of a Development Loan, when you borrow from more than one Lender at different Interest Rates. As they are drawn on a Stage Release Payment basis, and you are only charged interest on the amount drawn, it is challenging to calculate the actual interest rate over the course of the loan, if Senior and Mezzanine Lenders are both involved.

Estate Agent fees can be considered towards the overall Land Costs or Build Costs, and therefore can count towards the Client Equity contribution. Rules differ greatly between Lenders, so always clarify your Lender’s terms in advance.

The charge applied by a Lender at the point of Loan Redemption. It should be charged as a % of the Gross Loan, so ensure your Lender does not try to Levy it against GDV. An Exit Fee can be due at any time, regardless of when the loan is repaid, so it is different to an Early Repayment Charge.

How you intend to redeem your loan, i.e. via the Sale of a Property or Re-Finance. Your Lender will look at the plausibility of your chosen option and amend their terms accordingly.

F

The work that takes a development from foundations to having plaster on the walls. First Fix works include; construction of walls, floors and ceilings, laying pipes for water and gas, and cabling for electrical supply. Once the First Fix is complete the property is classed as being at Shell & Core stage.

Also known as Second Fix, it’s the work that follows First Fix, when the property is at Shell & Core stage. This covers the work that makes the property fit for occupancy; fixtures and fittings, floorboards and carpets, electrical equipment etc.

G

Gross Development Value. This is the projected value of a property development once it is completed.

The total income earned in return for a good or service.

The total loan you repay the Lender at the end of the loan term. It includes; the Net Loan, Rolled-Up Interest, Arrangement Fee and Lender Professional Fees. As the Borrower, you are able to drawdown the Net Loan for its agreed use.

Also known as Site Preparatory Works, this is the work needed before construction work starts; e.g. Demolition, Decontamination (if applicable), Site Clearance, etc.

H

Before a loan is Credit-Approved, HOTS are issued; a Term Sheet containing an indication of what the Lender could offer, based on the information you have provided. The terms are subject to change.

Development work that starts from scratch i.e. brand new builds rather than refurbs or conversions.

Normally attributed to properties worth more than £5m, which aren’t served by mainstream High-Street Lenders. Loans are usually made by Specialist Lenders or Private Banks.

Normally attributed to assets worth more than £1,000 psf or with a GDV of more than £1.5m. Relevant development experience is essential to secure finance, and Lenders will mainly look at the liquidity of the asset and their ability to exit the loan.

J

The Joint Contracts Tribunal, which offers standard form construction contracts, setting out the responsibilities of all parties. The Contractor is normally paid as work is completed and independently verified by a QS or Architect. Approx. 5% of the total contract value may be retained until 6 months after practical completion to allow for minor issues or snagging to be sorted out.

When two or more parties partner on a project. It makes sense for the partners to bring different skills to the venture. E.g. one may be an experienced Project Manager, whilst the other has more Equity to contribute. A contract will outline each partner’s contribution, as well as the division of profit share.

L

The costs incurred by a Developer in acquiring the site for a development project. Costs could include; the actual land, SDLT, agent fees, legal fees and valuation. You need a good understanding of these costs, as you can apply to borrow a percentage of the Total Project Costs.

The amount of a total loan advanced against the land. Development Loans consist of a Land Loan and a Build Loan. Lenders fund the full Build Costs, their own fees and Retained Interest through the Build Loan, with the residual loan being the Land Loan.

 Lenders make a number of assumptions when pricing a Development Loan, meaning the estimated total cost of the Loan always differs from the total Interest paid at the end of the project. A major assumption is that the Build Costs will spread evenly over the Build Term, and the Borrower will draw funds each month to cover those costs. This doesn’t happen in reality, so it’s important to provide a Cashflow to more accurately project borrowing costs.

Includes; Valuation Fee, Lender Legal Fees, QS Fees (both for the QS Initial Assessment and the ongoing Monitoring Fees).

The Lender will appoint their own QS to monitor the project, paid for by the Borrower. The QS conducts a QS Initial Assessment and QS Monitoring. Their role is to check that the Build Costs and timeline are realistic, and monitor the works throughout the project. Funds from the Build Loan can only be released by the Lender when the QS is happy with the works.

London Inter Bank Offer Rate; the rate at which banks agree to lend to each other on a wholesale basis. Normally used by Lenders in Development Finance as their Cost of Funds. The typical borrowing term is a 3-month Libor, but can range from 1 to 6 months.

A ratio to measure the loan granted in relation to the overall costs of a development project. Costs are split into Land Costs (purchase price of the site, SDLT, legal fees, etc.) and Build Costs (the build contract, QS, Architect, CIL, S106, etc.). A Lender will usually agree to advance a percentage of all of these costs, and include their own funding costs towards the total costs, as the interest and fees are normally rolled up (see Rolled-Up Interest).

A ratio to measure the Loan granted in relation to the overall end value of a development project. A Lender may offer 60% LTGDV and 80% LTC. The lower figure determines the final loan size advanced. The Loan advance will include an allowance for Lender interest and fees as these are normally rolled up. See Rolled-Up Interest.

M

The mainstream UK Mortgage Banks/High-Street Lenders or Retail Banks/Lenders. For Development Finance, look beyond these to the Private Banking or Specialist Lender sectors for the best deals.

The Gross Income earned by a Lender in return for granting a Loan. The Margin should be fixed throughout the Loan Term and will normally track an underlying Cost of Funds.

The costs incurred directly by the developer for promotional activities to help sell the site (e.g. brochures, hoardings, website, photography etc.) It is seen as a legitimate Build Cost by the majority of Lenders, and should therefore be included in the Development Appraisal as it will have a lending value (i.e. you can borrow a percentage of this cost if you want to).

The minimum amount of cash that the Lender requires from the Borrower. This can include any costs incurred directly by the borrower in relation to the development project, rather than just pure deposit. See also Sweat Equity.

Most Lenders ask that the development loan extends beyond the forecasted Build Term, to allow for the properties to be sold.

QS fees incurred by both the Lender and Borrower.

N

The value of the loan advanced after deductions, including arrangement fees and interest. The loan documentation will detail the Gross Loan (Net Loan + Fees + Interest) and the Net Loan.

The value of the development after Sale Costs (Agents Fees and Legal Fees) are deducted.

O

Any asset that will be used as office space.

P

The rate at which the Borrower pays their Loan Interest, i.e. the underlying Cost of Funds plus the Lender Margin (e.g. 3 Month Libor plus 2.75%).

Your legal promise to repay loans issued to a business where you are a beneficial owner, i.e. if the business becomes unable to repay a debt, you accept personal liability. They are standard practice for development finance and are required from all shareholders, or as a corporate guarantee.  The Industry average is 15%-25% of the total loan amount.

Official permission from a local authority to build or alter a building.

The estimated future profit of a business or project used to assess the scheme’s viability, and the potential Loan that could be secured.

A list of the properties that will be built. The schedule should include; address, square footage or meterage, value, £PSF or £PSM, achieved or potential rental, and number of bedrooms and bathrooms.

Q

The Lender’s QS assesses the experience and ability of the Main Contractor to build the planned project, as well as the accuracy of the budgeted Build Costs.

The ongoing work performed by the Lender’s QS to check the progress of a Development. Once pre-defined milestones are met, the Lender will release the next stage of the Loan to the developer.

The Lender appoints a QS to calculate the amount and cost of building materials needed for a property development. Borrowers may also appoint a QS, but sometimes on smaller schemes it is not necessary as the main contractor often has the required experience to fulfil the role.

R

The actual cash contribution in a deal from the borrower. This includes the Deposit and the transaction costs incurred when buying the property or site.

The Lender is asked to fund an Asset needing refurbishment. This normally means CapEx, value enhancement and lack of cashflow during the refurb process, so underwriting should take these into account. The Lender may choose to fund some of the work, and/or release monies on completion against the higher value.

The Net Loan, where the loan is calculated backwards from Gross to Net. The Residual Loan is available to go towards the purchase costs of the Land (see Land Loan). The Lender determines their maximum exposure or Gross Loan for the asset, normally expressed as a LTV percentage, and deducts their own costs; Arrangement Fees, Interest, Professional Fees, etc.

Also known as Payment in Kind (PIK) or Rolled-Up Interest. The lender advances the Interest to the Borrower, on top of the loan. This commonly occurs when the security is not an Income-Producing Asset. A Lender offers the Gross Loan, which includes Interest Cover and Capital. The Borrower draws down the Capital, or Net Loan. The Interest that would then be accrued over the agreed term is retained by the Lender rather than serviced by the borrower. At the end of the Loan Term, the Borrower would normally plan to Re-Finance or sell the asset to repay the Gross Loan (the Capital/Net Loan drawn, plus the Retained Interest).

Also known as Payment in Kind (PIK) or Retained Interest. The lender advances the Interest to the Borrower, on top of the loan. This commonly occurs when the security is not an Income-Producing Asset. A Lender offers the Gross Loan, which includes Interest Cover and Capital. The Borrower draws down the Capital, or Net Loan. The Interest that would then be accrued over the agreed term is retained by the Lender rather than serviced by the borrower. At the end of the Loan Term, the Borrower would normally plan to Re-Finance or sell the asset to repay the Gross Loan (the Capital/Net Loan drawn, plus the Retained Interest).

S

The Exit Strategy the Borrower plans to use to repay the Loan.

Also known as Fit-Out Works. The works that follow First Fix, needed to make the property ready for occupancy; connection of electrics, sinks, toilets, hanging of doors, etc. Commercial Property and High-Value Residential Property are sometimes built to Shell & Core stage to allow for specific owner/ occupant requirements.

The legal agreement between a Local Authority and a Developer seeking Planning Permission. It is used to mitigate the impact of the new Development on the local community. The agreement is binding on the site itself, so if the site is traded the agreement still applies. For larger schemes it could include the provision of affordable housing.

See Mixed Use.

When a site doesn’t need any Demolition, but does require the removal of materials before Build Works can commence. Materials could be trees, rubble or remains from a previously demolished structure.

See Ground Works.

Where a loan is released once works are completed (as confirmed by the Lender’s QS). A Development Loan is normally structured as a Land Loan to enable the purchase of the initial site. The Build Loan is then spread across the Build Term, with building milestones pre-agreed between the Borrower and Lender at the outset, to which additional funds can be advanced. Also known as funds on ‘a drip’. Also see QS monitoring.

A class of loans that offer higher LTC and/or LTGDV (up to 70% LTGVD) than a normal standalone Senior Lender (up to 65% LTGVD). It’s like a combination of Senior + Mezzanine, so you can achieve 75% LTGDV. As you would expect, rates are higher than for Senior Only Loans.

Large apartment blocks or communal accommodation, developed exclusively for student use.

The costs incurred in a Land purchase. Include Surveyor costs and/or Lender appointed Valuer costs, and costs for environmental or soil surveys.

The value added to a site before a development starts, typically through Planning Gain. The value add has been greater than the spend. Example: you buy a site at £2m, and spend £500k on planning. After Planning Permission, the site is worth £3.5m. Therefore, the Real Equity is £ 2.5m, and The Sweat Equity is £1m. Each Lender will take a different view on Sweat Equity and some won’t recognise it at all, but it’s a valuable tool for maximising your equity.

T

The cost of the build elements for a new Development, as agreed between the Developer and main Contractor.

Build Term + the Sales or Re-finance period.

Land Costs + Build Costs + Professional Fees.

Any directly attributable costs to the initial Land purchase, e.g. SDLT, Legal Fees, Surveys and Estate Agents fees.

See Pay Rate.

The costs of selling a property, including; Legal Fees, Estate Agent Fees, Marketing Costs & Dressing Costs.

Any workers outside of the main Contractor, that are typically needed for Second Fix; e.g. plumbers, carpenters and electricians.

The costs associated with making the Land Purchase, e.g. SDLT and Legal Fees. They are a legitimate cost for Lenders to consider in the Borrower’s overall Real Equity contribution to the scheme.

W

A guarantee that the property has been constructed to a standard set by the insurance provider. NHBC is one example of a warranty provider for Residential Property. A Warranty is essential before sale or re-finance to non-Development Finance.

When the main construction of a building has been completed, and only the Fit-Out Works are left to complete. See Shell & Core.When the main construction of a building has been completed, and only the Fit-Out Works are left to complete. See Shell & Core.