How commercial development finance works
From appraisal to drawdown to exit, how a commercial development facility is funded.
Commercial development finance is short-term funding for the purchase and construction of a commercial scheme. It is sized on the project rather than your income, capped at the lower of around 65 to 70 percent of cost and 60 to 65 percent of gross development value, drawn in stages against a surveyor's certificates, and repaid on sale or refinance.
At a glance
- Sized onThe scheme, not your income
- Loan to costUp to 65 to 70%
- Loan to GDVUp to 60 to 65%
- Term12 to 36 months
What is commercial development finance?
It is short-term funding that pays for buying and building a commercial scheme, repaid when the finished asset is sold or refinanced.
Unlike a mortgage, it is sized on the project, the cost, the finished value and the margin between them, not on your income.
How commercial development finance works
A lender funds most of the cost of the scheme, releases it in stages as the build progresses, and is repaid on completion.
You fund the gap between the loan and total cost as day-one equity, and carry the scheme to its exit.
The two parts of a development loan: land and build
A development facility comes in two parts.
- Land tranche: released at completion of the site purchase
- Build tranche: released in stages as construction progresses
You do not receive the full loan up front. The build funds arrive in arrears, against work already done, which is why cashflow planning matters.
How the loan is sized: loan to cost and loan to GDV
| Test | Typical cap | Measured against |
|---|---|---|
| Loan to cost (LTC) | 65 to 70% | Total project cost |
| Loan to GDV (LTGDV) | 60 to 65% | Finished commercial value |
The facility is the lower of the two figures. For commercial schemes, GDV is derived from the rent the asset will achieve and the yield an investor will pay, not from unit sales.
How much funding can you get?
Senior debt funds 65 to 70 percent of cost. Stretch senior reaches 75 to 80 percent, and mezzanine lifts combined leverage to around 85 to 90 percent of cost. JV equity can fund the rest.
Staged drawdowns and the monitoring surveyor
Construction funds release in stages, in arrears. An independent monitoring surveyor certifies the work done and the cost to complete before each drawdown.
The surveyor protects the lender by confirming the scheme is on programme and budget, which keeps the loan aligned with progress.
How interest is charged
Interest is usually rolled up into the loan and repaid on exit rather than serviced monthly, protecting cashflow during the build.
What is the usual term for development finance?
Most facilities run 12 to 36 months, matched to the build programme plus a letting or sales period. Operational assets may then move to stabilisation finance before a term exit.
The costs and fees involved
| Cost | Typical level |
|---|---|
| Interest | ~9 to 12% pa (senior) |
| Arrangement fee | 1 to 2% |
| Exit fee | On some facilities |
| Valuation + monitoring surveyor | Scheme dependent |
| Legal fees | Both sides |
How a commercial scheme is repaid
The loan and rolled-up interest are repaid at exit. The route depends on the asset:
- Investment sale of the let scheme to an institution
- Refinance onto long-term investment debt once let
- Development exit finance while units sell or let
- Stabilisation finance for PBSA, care homes and hotels that ramp to stabilised income first
Types of commercial development finance
| Type | Use |
|---|---|
| Senior development finance | The main facility funding land and build |
| Stretch senior | Higher leverage from one lender |
| Mezzanine | Second-charge top-up to reduce equity |
| JV equity | Funds the equity for a profit share |
| Stabilisation finance | Bridges an operational asset to stabilised income |
| Development exit finance | Refinances a completed scheme onto cheaper money |
Worked example: how drawdowns flow on a commercial build
On a typical commercial scheme the facility is released in tranches as the build hits milestones.
| Stage | What is funded |
|---|---|
| Completion | Land tranche released to buy the site |
| Substructure | First build drawdown against certified works |
| Superstructure | Further drawdowns in arrears, stage by stage |
| Practical completion | Final drawdown; scheme ready to let or sell |
| Exit | Loan plus rolled-up interest repaid |
Each build drawdown follows the monitoring surveyor's certification, so funds always lag the work done on site.
Development finance versus bridging and term debt
| Bridging | Development finance | Term debt | |
|---|---|---|---|
| Funds | Acquisition or hold | The build | A let, stabilised asset |
| Term | Days to ~12 months | 12 to 36 months | Years |
| Drawdown | Lump sum | Staged | Lump sum |
Most commercial schemes use all three in sequence: a bridge to buy, development finance to build, and term debt or a sale to exit.
How is commercial development finance calculated?
A lender works out the maximum facility by applying both caps to your figures and taking the lower result.
Loan to cost multiplies total project cost by the LTC percentage. Loan to GDV multiplies the finished commercial value by the LTGDV percentage.
The smaller of the two numbers is your facility; the rest is the equity you fund. A scheme with a strong margin between cost and value can borrow more of its cost before the GDV cap bites.
What can commercial development finance be used for?
The facility funds the full range of commercial development activity:
- Ground-up construction of offices, industrial, logistics and student accommodation
- Conversion of a building to a new commercial use
- Heavy refurbishment and repositioning of commercial stock
- Site purchase with planning, funded through into the build
- The commercial element of a mixed-use regeneration scheme
Each use is underwritten differently, but all share the same two-part, staged structure.
Who lends on commercial development?
The market spans high-street banks, challenger banks, specialist development lenders, debt funds and private capital.
Each lender has its own sector appetite, leverage ceiling and pricing. A bank may want a pre-let office; a debt fund may back a speculative logistics shed; a specialist may favour care homes.
That spread is why running a scheme across the whole panel beats approaching a single lender, and it is the core of what we do.
Is it easy to get commercial development finance?
It is straightforward for a viable scheme presented well, and difficult for a thin one presented poorly.
A clean appraisal with a sensible margin, a credible team and a clear exit is funded readily. A speculative scheme with a tight margin or an unproven team is where deals stall.
What happens if the build overruns?
Facilities carry a contingency and a margin within the term to absorb modest overruns in cost or programme.
Where an overrun threatens the term, development exit finance can refinance the scheme onto cheaper money while it completes and sells, or the facility can be extended by agreement with the lender.
How much deposit do you need?
Because senior debt funds 65 to 70 percent of cost, the developer funds roughly 30 to 35 percent as day-one equity.
Stretch senior, mezzanine or a JV equity partner reduce that figure. Our deposit guide sets out each route in detail.
Development finance versus a commercial mortgage
Development finance funds the build of a commercial scheme over the short term. A commercial mortgage is long-term debt secured on a finished, income-producing commercial property.
A scheme often moves from one to the other: development finance builds it, then a commercial mortgage or investment loan holds it once let and stabilised.
How commercial development finance works: common questions
How does commercial development finance work?
A lender funds most of the cost in a two-part loan (land then staged build drawdowns), sized at the lower of about 65 to 70 percent of cost and 60 to 65 percent of GDV, with a monitoring surveyor certifying each drawdown. It is repaid on sale or refinance.
Is it based on my income?
No. It is sized on the commercial scheme: the cost, the GDV derived from rent and yield, and the margin, plus your track record and the exit.
What is the usual term?
Most facilities run 12 to 36 months, matched to the build plus a letting or sales period. Operational assets may move to stabilisation finance before a term exit.
What is a monitoring surveyor?
An independent surveyor who certifies build progress and cost at each drawdown, so the lender releases funds in line with work actually done on site.
How is a commercial scheme repaid?
Through an investment sale, a refinance onto term debt, development exit finance during the sales or letting period, or stabilisation finance for operational assets that ramp to stabilised income first.
How is development finance calculated?
By applying two caps and taking the lower: loan to cost (around 65 to 70 percent of total project cost) and loan to GDV (around 60 to 65 percent of finished value). The lower figure is your facility, and the rest is equity.
Is it easy to get commercial development finance?
It is straightforward for a viable scheme presented well, a clean appraisal with a sensible margin, a credible team and a clear exit. A thin or speculative scheme with an unproven team is where deals stall.
Ready to fund a scheme?
Send us the outline and we will come back with a view on fundability and likely terms within one working day.