Development Finance

Question 1

What are the main forms of development finance?

Answer 1

• Debt finance: borrowing from banks or lenders.
• Equity finance: using internal funds or raising capital through investors or joint ventures.
• Mezzanine finance: higher‑risk secondary lending which sits behind senior debt.
• Forward funding or forward sale structures.

Question 2

What is the Loan to Value (LTV) ratio?

Answer 2

• LTV expresses the proportion of the development cost or completed value that lenders will fund.
• Typical LTV ratios for development finance are around 60%.
• In uncertain markets, lenders may use Loan to Cost (LTC) instead.

Question 3

What is rolled‑up interest?

Answer 3

• Interest that is added to the loan balance rather than paid monthly.
• Ensures the developer does not need to service interest during the build.
• Total finance cost increases as interest compounds over the development period.

Question 4

What is the S‑curve principle in construction finance?

Answer 4

• Construction expenditure typically follows an S‑shaped pattern (slow start, rapid expenditure, slow finish).
• Appraisals assume half the total construction cost is borrowed for half the construction period.
• This produces a more realistic interest calculation than assuming uniform monthly spending.

Question 5

What are holding costs in a development appraisal?

Answer 5

• Costs incurred after practical completion until disposal or occupation.
• Include empty rates, service charges, security, insurance, and additional finance charges.
• They must be included to avoid overstating profitability.