Ground up development finance, from senior debt to the full capital stack

Ground-up versus conversion: the view from the lender's chair

A conversion starts with a building that has value on day one and keeps most of it throughout the works. A ground-up scheme spends its first months going backwards: demolition, groundworks, foundations, drainage, all cash out with almost nothing a receiver could sell if the scheme stopped. Below-ground risk is also where the genuinely unbudgetable problems live, contaminated soil, unexpected services, archaeology, which is why credit committees price new build above conversions of equivalent size and scrutinise the groundworks package and site investigation hardest.

The practical consequences for the borrower: experience requirements are stiffer, the contingency expectation is firmer, the monitoring surveyor visits matter more in the early months, and the part-built valuation that determines what happens in a workout is lower relative to money spent. None of this makes ground-up hard to fund. It means the file has to anticipate the questions, which is what we build it to do.

The capital stack, with the numbers attached

Four layers can fund a new-build scheme. Senior debt takes the first charge and the lowest risk, at 7 to 11 percent a year and 60 to 65 percent of GDV, 80 to 85 percent of cost. Stretched senior is one loan that pushes to 70 to 75 percent of GDV and 85 to 90 percent of cost at 9.5 to 13 percent. Mezzanine sits behind senior on a second charge at 14 to 20 percent, topping the stack to around 90 percent of cost. Equity, yours and any investors', fills whatever remains. All figures as of June 2026.

Stacked example on a £1,425,000 total-cost scheme with a £1.8m GDV. Senior at 65 percent LTGDV provides £1,170,000, leaving £255,000 of equity. Add mezzanine to 90 percent of cost, a £112,000 second-charge tranche at 16 percent, and equity falls to £143,000. The blended cost of that £1,282,000 debt package is the weighted average: £1,170,000 at 8.5 percent plus £112,000 at 16 percent gives roughly 9.2 percent blended. The mezzanine looks expensive in isolation; across the whole stack it adds about 0.7 percent to the cost of the debt while nearly halving the cash you need in the deal.

That is the correct way to evaluate mezzanine finance on property: pounds of equity saved against pounds of extra interest, not the headline rate. On schemes where the freed equity funds a second profitable site, paying 16 percent on a thin tranche is frequently the right trade.

When stretched senior beats senior plus mezzanine

The same £1,282,000 of debt could come from one stretched senior lender at, say, 11 percent. On rate, the blended senior-plus-mezz package at 9.2 percent wins. But the comparison is not only rate. Two lenders means two arrangement fees, two sets of legals, and an intercreditor deed that takes weeks to negotiate and governs every consent for the life of the loan. When the programme slips, and programmes slip, you renegotiate with two credit committees whose interests diverge, because the mezzanine lender is wiped out long before the senior is touched.

Our rule of thumb: below roughly £150,000 of mezzanine the friction usually eats the rate saving, and stretched senior, one relationship, one decision-maker, one set of documents, is the better structure. Above that, and especially on larger schemes where the mezzanine tranche is meaningful, the two-lender stack earns its complexity. We price both structures on every ground-up case and show you the all-in cost of each, fees and friction included.

Planning conditions, CIL and Section 106 in the day-one advance

Lenders read the planning permission as closely as the appraisal. Pre-commencement conditions, the ones that must be discharged before a spade goes in, are a funding condition too: most lenders will complete the land advance but withhold works drawdowns until the discharge letters are produced, and a borrower who has not priced the surveys and submissions needed to discharge them loses months at the worst point in the programme.

Community Infrastructure Levy and Section 106 obligations are hard costs and the lender will check they are in the appraisal. CIL is payable on commencement unless an instalment schedule applies, so it lands early, exactly when cash is tightest, and a missed CIL form can forfeit instalment rights entirely. Where CIL and S106 liabilities are material relative to the land price, lenders trim the day-one land advance to keep total exposure inside the loan-to-cost cap. We flag the number at term-sheet stage so the facility is sized around it rather than surprised by it.

Build contracts: what lenders want to see

The build contract allocates the cost risk, so lenders care about its form. A fixed-price design and build contract with a creditworthy main contractor is the gold standard: one party owns design and construction risk, and the lender takes a collateral warranty so it can step into the contract if the borrower fails. Traditional JCT standard or intermediate forms with an external design team are widely accepted; JCT minor works suits the small end. The structures lenders resist are self-managed builds with trades engaged directly and cost-plus arrangements, both of which leave overrun risk with the borrower, and therefore, via the cost overrun guarantee, with the lender's recovery position.

If you self-deliver as a developer-contractor, expect the lender to underwrite your construction capability separately, want a quantity surveyor's cost plan rather than your own, and hold a firmer contingency. It is fundable, but it narrows the panel and the file has to be stronger.

New-build warranties: a lending condition, not a formality

Every new-build facility we place carries a warranty condition. NHBC Buildmark and LABC are the most recognised ten-year structural warranties, with several alternative providers acceptable to most of the market. The warranty has to be in place from commencement, not bolted on at the end, because the provider inspects through the build, and retrofitting cover is expensive where it is possible at all. It also protects your exit twice over: buyers' mortgage lenders generally require an acceptable warranty before lending on a new-build unit, and a development exit lender refinancing you at completion will require it too. An architect's certificate is sometimes accepted instead, but it shrinks the pool of mortgageable buyers and we rarely recommend it on schemes built to sell.

Phased schemes and revolving facilities

On sites of ten units and upwards, phasing changes the economics. Building in two or three phases lets sales receipts from phase one fund part of phase two, cutting peak debt, total rolled interest and the equity requirement, at the price of a longer overall programme. Lenders support it with phased drawdown profiles and release pricing that recycles sales proceeds into the next phase rather than sweeping everything to redemption. For repeat developers, the logical end point is a revolving relationship: terms pre-agreed with one lender so each site draws on a known template, which compresses the six-to-eight-week credit process into a fortnight. We set these up once a track record supports them, and the GDV evidence standard in our gross development value guide is what keeps them renewing smoothly.

Worked example: six-unit new build, £1.8m GDV

A landlord-developer with two completed conversions buys a consented site for six houses, 850 square feet each, GDV £1.8m supported by three sold comparables. Costs: land £350,000, build £842,000 (£165 per square foot on a fixed-price design and build contract), professional fees £65,000, contingency £63,000, CIL and S106 £35,000 priced in, rolled finance costs estimated at £105,000 inside a total cost of £1,425,000 once allowances are netted. Projected profit after £45,000 of sales costs: £330,000, roughly 22 percent on cost, clearing the 17.5 to 20 percent hurdle with margin.

The constraint check from our development finance calculator: senior at 65 percent LTGDV allows £1,170,000; at 85 percent LTC, £1,211,000. LTGDV binds. With £255,000 of equity stretching the client thin, we price the alternatives: stretched senior of £1,282,000 at 11 percent, or senior at 8.5 percent plus a £112,000 mezzanine tranche at 16 percent, blending to 9.2 percent. The mezzanine tranche is small enough that intercreditor friction outweighs the rate saving on an 18-month programme, so the client takes stretched senior: £1,282,000, one lender, equity in the deal of £143,000.

Day-one land advance of £210,000 (60 percent of land value) completes the purchase alongside the client's equity, works draw monthly against monitoring surveyor certificates, the warranty is in place from commencement, and the facility carries a PG capped at 25 percent. Exit: three units pre-sold off-plan complete at PC, the remaining three refinance onto a development exit facility while they sell, releasing the equity for site number two.

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