As a property developer overseeing £50-100M GDV projects, you're well-versed in evaluating financing options. But have you ever looked beyond the headline interest rates from lenders to understand what your development financing truly costs?
When evaluating development finance, most conversations start with interest rates. A typical capital stack might include:
This creates a blended rate of 12-14% - the figure that often drives initial decision-making. However, this headline rate only scratches the surface of your actual financing cost.
The real cost of development finance encompasses multiple financial components that aren't immediately visible in interest rate discussions. For a typical £45M facility on a £75M GDV project over 24-months, these include:
Traditional financing typically requires paying arrangement fees to both senior and junior lenders. A senior lender might charge 1% while a mezzanine provider often charges 3% or more. This represents nearly £800,000 in fees before construction even begins.
Each lender requires separate legal documentation, often with their own solicitors and specific requirements. This not only creates legal costs (typically £120,000+ for both sets) but also introduces complexity into your documentation and potential conflicts between different lenders' requirements.
Both lenders will charge separate ongoing monitoring fees and potentially exit fees. These combined costs typically amount to 1.2% of the facility - another £540,000 on a £45M facility.
Perhaps most overlooked is the time value of managing a complex financing structure. Traditional multi-lender financing often requires 8-12 weeks to close, with each week of delay adding to:
When all these costs are factored in, the effective rate on traditional development financing for a 24-month project is actually 18.1% per annum - significantly higher than the headline blended rate of 12.4%.
This differential represents a substantial impact on project returns, particularly in today's challenging
environment where margins are under pressure from multiple directions.
As the development finance landscape evolves, various financing structures are emerging to address different aspects of these challenges. Whole loan solutions, which provide unified financing across both senior and junior tranches, offer opportunities to streamline processes and documentation, potentially reducing administrative complexity.
While fee structures remain relatively consistent across the market, unified financing approaches can deliver operational advantages:
When evaluating financing options, consider these key questions:
Understanding the true cost of development finance requires looking beyond the headline rates to consider the complete financing picture. This holistic approach to evaluating financing options can help you make more informed decisions that optimize both financial outcomes and operational efficiency.
As development margins face continued pressure, this comprehensive view of financing costs becomes increasingly important to project success.
Next week in this series: "One loan to rule them all: Simplifying residential development financing" - exploring how unified financing structures streamline the development process.