One of the key questions any property developer has when assessing funding is: “How much can I borrow?”
The answer to this question is based on a variety of factors that lenders evaluate to determine the amount of debt to advance for the developer’s project. The key metrics used by lenders, and the most important ones to understand are loan-to-value (LTV), loan-to-cost (LTC), and loan-to-gross-development-value (LTGDV). Understanding these metrics is important because they directly affect the maximum loan available, the equity contribution required from the developer, and whether the project is financially viable.
In simple terms, lenders ask three key questions:
- What is the current value of the site?
- What is the total cost of delivering the scheme?
- What will the completed development be worth?
Each of these points are answered using different measurements, and each can materially impact the final capital structure.killed bridging finance broker.
What is Loan-to-Value?
Loan-to-Value (LTV) compares the loan amount to the current value of the asset being financed.
The formula is:
LTV = loan amount ÷ current value
For example, if a development site is valued at £5,000,000 and the lender provides a day-one advance of £3,000,000, the LTV is 60%.
LTV is usually most relevant when the developer plans to purchase the site first (land with planning) or refinance an existing facility secured on the site.
What is Loan-to-Cost?
Loan-to-Cost (LTC) measures the loan amount against the total cost of delivering the development.
The formula is:
LTC = loan amount ÷ total development cost
Total development cost typically comprises the land cost, build costs, professional fees, planning costs, contingency, and other additional project costs. Finance costs are usually not included in the calculation, although this does depend on the lender. For example, if a project has total costs of £2,500,000 and the lender provides a gross facility of £2,000,000, the LTC is 80%.
LTC is important because it shows how much of the project cost is being funded by debt and how much is being funded by the developer’s own equity. A lender may be comfortable to fund 100% of the build costs, however that does not mean they will fund 100% of the total development costs. The developer will still need to contribute equity, often towards the land purchase, professional fees, planning costs, and other upfront costs.
What is Loan-to-Gross-Development-Value (LTGDV)?
LTGDV compares the loan amount to the expected value of the completed scheme.
The formula is:
LTGDV = loan amount ÷ gross development value
Gross development value (GDV) is the estimated value of the completed development, usually based on the expected sales value of all completed units. For example, if a completed scheme is expected to be worth £4m and the lender provides a gross facility of £2.8m, the LTGDV is 70% (£2.8m ÷ £4m).
LTGDV is a key factor for the lender as it indicates their exposure against the completed value of the development. The lender assesses LTGDV to get comfort that there is enough value in the completed development to repay their debt, even if sales are slower than expected or values soften.
Why Do Lenders Use All Three Metrics?
There is a key difference between development finance brand standard mortgages – the security is undergoing a material change during the term of the loan.
At the start, the lender’s security can often just be a piece of land or partially completed property. As the development progresses, the value of the asset should increase and by the end of the project, the security is expected to be worth significantly more than the original value of the site. Consequently, lenders need to assess the project from several angles.
LTV helps assess the lender’s position on day-one. LTC provides a measure of how much of the total development cost is being funded with debt, whilst LTGDV evaluates the lender’s exposure against the value of the completed scheme. A lender may say that they can provide 70% LTGDV, however that does not necessarily mean every project or developer qualifies for that level of leverage – the whole project would need to fit within the lender’s LTC, LTV, and risk appetite.
Worked Example: How much Can a Developer Borrow?
Assume a developer is purchasing a site and has planning permission to deliver a small residential development.
The project figures are:
- Land purchase price: £1m
- Build costs: £1.3m
- Professional fees, contingency, and other costs: £200k
- Total development cost: £2.5m
- Gross development value: £3.5m
Assume the lender’s maximum limits are:
- 65% day-one LTV
- 90% LTC
- 70% LTGDV
Based on LTC. The maximum facility would be:
- £2.5m x 90% = £2.25m
Based on LTGDV, the maximum facility would be:
- £3.5m x 70% = £2.45m
Whilst the LTGDV suggests the lender can provide £2.45m, the LTC caps the amount that the lender can offer at £2.25m. Therefore, the maximum loan that the lender can provide is £2.25m. It is for this very reason that a developer should not analyse LTGDV in isolation, as the loan amount is usually capped at the lower of LTC and LTGDV. In this example, the 65% day-one LTV would limit the initial advance against the land purchase to £650k, with the balance of the facility released through staged drawdowns as works progress.
How Development Finance Is Usually Advanced
The funds provided by the lender for a development are not released in one lump sum like a mortgage. In contrast, the facility is split between an initial day-one advance used to fund the site purchase or refinance, and then the balance is released through staged drawdowns to fund the construction. These stage drawdowns are advanced in line with the progress of the development. A monitoring surveyor (MS) will typically inspect the site at the end of each month and provide confirmation to the lender that the works have been completed in line with the build programme. This provides comfort to the lender that their funds are being used efficiently and for their intended purpose.
Why the Developer’s Equity Contribution Matters
Regardless of the level of debt that the lender offers, the developer will be required to put some of their own money into the project. The reason that lenders require borrower equity is because they want to see financial commitment from the developer and comfort that the developer is also willing to share risk in the scheme. The equity contribution also helps provide a buffer if costs increase or sales values decrease. Lenders will often feel most comfortable when the developer can contribute their own cash into the deal, rather than having to rely on third-party investors, or subordinated forms of debt.
Summary
For property developers, ensuring that you understand these key metrics and how they are calculated before obtaining funding can make a significant difference to the outcome. It allows the funding requirement and capital stack to be structured properly which enables a more effective lender selection process.
At Silver Oak Capital, we assess each development finance transaction across a broad panel of lenders to identify which funding routes are likely to deliver a tailored solution with suitable leverage, terms, and a bespoke structure for the project.
