Development Finance Jargon Buster

Compound interest is the interest that has been added to a loan or deposit. This is calculated based on the accruing interest and the initial loan agreement. Depending on the compound periods set out in the loan this will increase each new period as it will charge interest rate on the interest you have already accrued.

The drawdown payment method refers to credit or payment that is released in sections over time. For example, you may receive 50% of funding before your project begins and the remaining 50% once you have completed a certain percentage of the project.  

The default rate, also known as the penalty rate, is used to two ways. Firstly, it can be used to describe the higher interest rates enforced on a borrower that has missed payments. For example, if you have missed three monthly payments, you may be charged a default rate of an additional 10% interest on future payments.

Secondly, it can also be used to refer to the amount of a loan that a lender writes off after failure to pay. For example. If you are unable to meet payments a lender may settle a default rate with you, where you will only have to pay a certain percentage of the loan back. 

Developers’ contribution to the deal.

A property developer typically puts in 20% of total costs as equity. However, lenders require a minimum of between 10% – 40% of equity as a percentage of total project costs.

The Gross Development Value (GDV) is the anticipated open-market sales value or forecast revenue of the development once all works are completed. For example, the gross development value of a new house will be the predicted market price.

The gross loan facility is the total loan value, including fees and interest. Therefore, if your loan is £1,000,000 for 12 months with an annual interest rate of 5%, then gross loan facility will be £1,050,000.

The arrangement fee is an administration charge that is paid to the lender at the time of signing the agreement. This is typically treated as a set up fee and is a set percentage of the loan. Whether the fee is subtracted from the total loan repayments, or an extra cost is at the discretion of the lender.

Joint venture finance is where a third-party funds a development rather than you self-funding your own project. Usually, up to 100% of the development costs are provided by a finance partner. A profit share and interest may be part of the development finance structure.

The loan to cost (LTC) is a calculation used to determine the percentage of a projects total cost that a loan is covering. The higher your LTC ratio the ‘riskier’ the investment for lender. Typically, lenders will only finance a development with a loan to cost of up to 80%.

A hybrid of debt and equity finance, mezzanine finance is when a second lender issues junior debt as a development finance loan on top of senior debt development finance. The facility is usually used when developers want to minimise their equity in a project.

The lender appoints this professional Quantity Surveyor to oversee the project from start to end. The monitoring surveyor reports on the project progress as well as proposing/agreeing to the value of the latest drawdown.

 The net loan is the cash available to the borrower from the development finance. The figure is the gross loan facility minus fees and interest.

A precursor to full planning permission, outline planning permission is used as an early-stage indication of whether full planning will be granted and dictated the general principles of how a site can be developed i.e. if you can build residential homes in that space.

This is a legal promise by the borrower to guarantee to repay outstanding company debt on the project if the loan is not fully repaid. For example, if a business cannot repay, the personal guarantor will be the individual held personally liable for payment. This is usually the business owner or director.

Permitted development rights are the rules and regulations that allow specific work to be completed without the need for planning permission. These rights are dictated by Parliament and not at a local authority level. It is worth noting that these right change from development to development. For example, the guidelines for extensions to residential properties are different from those of commercial.

 The planning gain refers to the increase in value of the site, created when planning permission is granted.

Return on costs is used to determine if the profitability of the project is sufficient for it to be funded and if the purchase price is correct. Projects typically require a 25% or more return of costs to ensure they are covering all costs and making a profit.

An interest roll-up is an option where the interest is paid at the end from a sale or refinance rather than being paid as ongoing payments as part of your agreed repayment plan.

The most common type of development finance, senior debt finance is a first charge development finance loan. These loans typically cover most of the funding needed to complete a development project and allow work to begin without personal funds being used.

This is a first charge debt with enhanced leverage compared to senior debt finance, enabling property developers’ access to a greater level of funding – it is typically at 90% Loan to Project Cost.

The second charge describes any further monetary advance such as loan, that is taken out after a first charge loan. An example of a second charge loan is Mezzanine finance which often used to minimise the amount of equity a developer has in a project.

The term is the agreed length of the development finance loan, usually set between six and 24 months.

Similar to the drawdown method, tranche payment is the staged release of money that funds the property development during the life of the project. For example, you can receive a set sum of money each month until the project is complete.