Property development finance can unlock projects that would otherwise be impossible to fund through traditional banks. However, many developers approach lenders without understanding how credit committees actually evaluate deals.
Behind the scenes, lenders analyse every project using a structured underwriting process. Understanding these criteria before approaching lenders can dramatically increase approval chances and reduce wasted time.
Below are the key factors lenders review when deciding whether to fund a development project.
1. Profit Margin on Cost
The first question lenders ask is simple:
Is there enough profit in the deal?
Profit margin is typically calculated as:
Profit ÷ Total Development Cost
Most lenders prefer to see a margin of:
• 15–20% minimum
Projects with thin margins create risk because unexpected costs, delays or market changes can eliminate profits.
If the margin is strong, lenders become far more comfortable providing higher leverage.
2. Loan to Cost (LTC)
Loan to Cost measures how much of the project is funded through debt relative to total development cost.
Formula:
Loan Amount ÷ Total Cost
Typical ranges include:
• 60–70% LTC for standard development finance
• up to 85–90% LTC in Stretch Senior Debt UK
Higher leverage reduces the developer's capital requirement but also increases lender risk, which is why other factors must be strong.
3. Loan to Gross Development Value (LTGDV)
Another crucial metric is LTGDV, which compares the loan size to the completed value of the project.
Formula:
Loan Amount ÷ Gross Development Value
Typical lender limits are:
• 65–70% LTGDV
Even if the LTC is high, a conservative LTGDV protects lenders if the market value falls.
4. Planning Status
Planning risk is one of the biggest concerns for lenders.
Projects are generally categorized into three stages:
Pre-Planning
Highest risk stage.
Many lenders will not fund at this stage.
Planning Pending
Funding may be possible but with lower leverage.
Planning Granted
This is where most development finance becomes available.
The clearer the planning status, the easier it is to secure funding.
5. Developer Experience
Lenders strongly prefer working with experienced developers.
They will typically review:
• number of completed projects
• project sizes previously delivered
• contractor relationships
• track record of exits
Less experienced developers can still obtain funding, but the lender may require additional equity or stronger project fundamentals.
Heavy refurb bridging finance can sometimes be a suitable alternative for developers with less experience, provided the project fundamentals are strong and the refurbishment plan is well-structured.
6. Exit Strategy
Every development loan must have a clear exit.
Typical exits include:
• sale of completed units
• refinance into long-term investment loans
• forward funding by investors
Lenders carefully evaluate whether the exit is realistic based on market demand.
Refinance expiring bridge loan is one way developers manage their exit when short-term funding is nearing maturity and a longer-term solution is needed.
7. Construction Budget
Cost overruns are one of the biggest risks in development.
Lenders therefore examine:
• detailed build budgets
• contingency allowances
• contractor experience
• procurement strategy
A well-structured cost plan increases confidence that the project will be completed on schedule.
Final Thoughts
Development finance is not simply about presenting a property opportunity. It requires demonstrating that the project meets a lender's underwriting framework.
Developers who understand these criteria before approaching lenders significantly improve their chances of approval and often secure more favourable terms.
Zero fee property development finance can further enhance project returns by reducing upfront costs and preserving capital for delivery.
Preparing a structured development case with clear metrics, planning clarity and a realistic exit strategy can make the difference between rejection and funding.
