Industrial and logistics development finance explained

Development finance is a short-term loan that funds the construction or heavy refurbishment of property. For a developer building a warehouse, a logistics shed or a multi-let industrial estate, it is the funding line that pays for the land, the build and the professional fees while the scheme moves from a bare site to a finished, lettable or saleable asset. We arrange development finance for industrial and commercial schemes across the UK, and as an introducer rather than a lender we sit on your side of the table when we approach the market on your behalf.

This guide explains how development finance works in plain terms. We look at how a facility is structured around loan to cost and loan to gross development value, how money is released in drawdowns as the build progresses, what rates and fees to expect, and how a scheme is repaid or refinanced once it completes. Whether you are funding your first unit or rolling several projects at once, the principles below apply, and the right structure can make the difference between a thin margin and a healthy one.

What is development finance and when do you use it?

Development finance is a facility designed for ground-up construction and major works, where the value of the security changes dramatically over the loan term. A standard commercial mortgage assumes a finished, income-producing building. Development finance assumes the opposite at the outset: you start with land or a tired building, and the lender funds the journey to a completed asset. Because the risk profile shifts as the build progresses, the loan is structured very differently from a long-term mortgage.

You use development finance when you are constructing a new industrial unit, converting an existing building to warehouse or distribution use, or undertaking a refurbishment large enough that the works materially change the value. Developers building to sell use it to fund the scheme through to disposal. Developers building to hold use it to reach practical completion, after which they refinance onto an investment facility. In both cases the loan is short-term, typically running from twelve to twenty-four months, and is repaid in a single lump rather than amortised month by month.

How is loan to cost different from loan to gross development value?

Two ratios govern almost every development facility, and understanding the difference matters more than any headline rate. Loan to cost measures the facility against the total cost of delivering the scheme, including the land, the construction budget and the professional fees. A lender funding up to seventy percent loan to cost expects you to contribute the remaining thirty percent, usually weighted towards the land at the start.

Loan to gross development value, or loan to GDV, measures the same facility against what the finished asset will be worth. Most lenders cap a development loan at around sixty to sixty-five percent of GDV, even where the loan to cost figure would allow more. The valuation that supports the GDV is therefore central to how much you can borrow, and a cautious valuation will constrain the facility regardless of how the costs stack up.

In practice a lender applies both tests and lends to whichever produces the lower figure. A scheme with a strong margin between cost and end value will be limited by loan to cost, meaning your equity requirement is modest. A scheme with a thinner margin will hit the GDV ceiling first, and you will need to put in more of your own money. We model both ratios before we approach the market so there are no surprises when terms come back.

How are development funds drawn down through the build?

Development finance is not handed over in one payment. The land portion is usually released on completion of the purchase, and the build portion is released in stages, known as drawdowns, as the construction progresses. Each drawdown is signed off by a monitoring surveyor appointed by the lender, who visits the site and confirms that the work claimed has actually been done and that the remaining budget is still sufficient to finish the scheme.

This staged approach protects both sides. The lender only ever advances money against work that exists on the ground, which limits its exposure if the project stalls. The developer pays interest only on the money drawn, not on the full facility, so the interest cost stays low at the start and rises as the building takes shape. Interest is normally rolled up rather than serviced monthly, meaning it is added to the loan and settled at the end, which keeps cash free during construction when there is no rental income to cover the repayment.

Smooth drawdowns depend on a realistic cost schedule and a contractor who keeps to programme. Delays in the monitoring surveyor signing off a stage can choke cash flow, so we work with the borrower to present a clean, well-evidenced drawdown plan up front.

What rates, fees and repayment terms apply?

The headline rate on development finance is higher than on a term loan secured against a finished building, because the lender is funding a moving, unsold asset rather than a settled income stream. Pricing reflects the experience of the developer, the strength of the scheme and the loan to GDV. Alongside the rate there is an arrangement fee charged on drawdown and, on most facilities, an exit fee charged on repayment, sometimes calculated against GDV rather than the loan amount, which can make it a meaningful cost.

Repayment is structured around the end of the project, not the calendar. Because interest is usually rolled up, there is no monthly repayment to service during the build, and the whole loan plus accrued interest is repaid in one go when the scheme sells or refinances. You should always include a contingency in the budget, because cost overruns and short delays are common, and a lender will expect to see headroom rather than a budget cut to the bone.

We compare the total cost of finance across the market rather than the rate in isolation, because a facility with a low rate but a punchy exit fee can work out dearer than a higher-rate alternative. Getting the full cost picture right protects the developer's margin, which is the number that ultimately matters.

Who qualifies and what do lenders look for?

Lenders assess the scheme and the people behind it together. A clear track record of delivering similar projects is the single strongest factor, and a first-time developer will usually need a credible build team and a contractor with a proven history to compensate. The lender wants confidence that the project can be delivered on time and on budget, because its security only becomes valuable once the building is finished.

On the scheme itself, a lender looks for a realistic cost plan, a supportable end valuation and, where the plan is to sell, evidence of demand for the finished units. Where the plan is to hold and let, the lender will want comfort that the space is the kind of warehouse or industrial unit that a tenant will take, since the eventual investment refinance depends on a signed lease and rental income. Planning permission needs to be in place, or at the very least a clear and credible route to it.

We package the borrower's experience, the cost plan and the exit strategy into a clean proposal before we approach the market, which is the most reliable way to secure competitive terms from a lender rather than a cautious offer.

How does development finance differ from a commercial mortgage or bridging?

A commercial mortgage is a long-term loan secured on a finished, income-producing building, repaid over many years from rental income or trading profit. Development finance is its opposite in tempo and purpose: short, staged and repaid in a lump. You would never use a commercial mortgage to fund a build, because no lender will advance long-term money against a site that does not yet produce income.

Bridging sits closer to development finance and the two are often confused. Bridging is a short-term loan used to buy quickly or to cover a gap, and it can fund light refurbishment, but it does not release money in construction drawdowns and is not designed for ground-up building. A bridging loan suits a developer who needs to secure a site fast before a full development facility is arranged, and bridging is also used to buy at auction where speed is everything. Bridging is priced for speed and short duration, so it is dearer per month than a development facility and is meant to be repaid quickly once the longer-term funding lands. Where the works are substantial, development finance is the correct tool because its drawdown structure and monitoring are built for construction.

The neat way to see it is by stage. Bridging buys the opportunity, development finance builds it out, and a commercial mortgage or investment facility holds it once it is complete and let. Each is a distinct loan with its own purpose, and matching the right one to the right stage keeps the cost of finance down.

What is development exit finance and when does it help?

Development exit finance is a short-term loan that replaces a development facility once the building is substantially complete but not yet sold or fully let. It is one of the most useful tools in the funding chain and one of the least understood. As a scheme nears practical completion its risk drops sharply, yet the original development loan may be approaching the end of its term and carrying the higher rate that construction risk demanded.

Refinancing onto development exit finance at that point does two things. It buys time to sell the units or sign a lease without the pressure of a looming repayment date, and because the asset is now finished and far less risky, the rate is usually lower than the development loan it replaces. That cut in interest cost protects the margin during the sales or letting period, which is exactly when a developer is most exposed.

Once the units sell, the loan is repaid from the proceeds. Where the plan is to hold, the developer refinances again onto a long-term investment mortgage secured on the rental income, completing the move from short-term construction funding to settled, amortising debt. We map this full path at the outset so the exit is planned, not improvised, and so the borrower knows which lender takes the building at each step.