How development exit finance works

What triggers a development exit bridge at practical completion

Development exit finance is triggered when a scheme is finished or close to finished and the original development facility is approaching its maturity. The pivotal event is practical completion, or PC, the point a surveyor certifies the building is complete and fit for occupation. Once PC is reached the build risk has gone, so the asset is materially less risky than it was during construction, and the cost of debt against it can fall.

Most development loans are written to a hard term and start to run to maturity well before every unit has sold. A developer who reaches PC with completed but unsold units faces a maturity date, and often a penalty or default rate if the loan runs over. A development exit bridge replaces that maturing senior debt with a calmer facility and buys time to sell without a fire sale. We arrange this finance as an unregulated commercial bridge secured on the completed scheme.

How exit funding repays the senior development lender

Exit funding works by drawing a single new facility that repays the outstanding development loan in full and takes its place. The new lender takes a first legal charge over the property, the same security position the development lender held, so the original senior debt is redeemed on completion of the bridge and the developer is left with one cleaner facility running across the sales period.

The timeline is short. A typical sequence runs from enquiry to a fresh RICS valuation, then to terms, legals and drawdown that clears the development lender before its maturity bites. Speed is the point, because the value of an exit bridge is avoiding the penalty or default rate that a development loan charges once it runs past term. Specialist lenders active in this market, such as Shawbrook and LendInvest, are geared to replace maturing senior debt at pace, though we place each case with whichever funder fits the scheme.

1. Reach practical completion, or a defined near-complete position the surveyor will confirm.
2. We arrange a fresh RICS valuation of the completed scheme to establish gross development value.
3. The new facility is sized on GDV and offered with a first legal charge.
4. Drawdown repays the senior development lender in full before its term expires.
5. The developer runs the sales period under the new bridge and redeems by sales or refinance.

Sizing a finished-scheme bridge against GDV

A finished-scheme bridge is sized against gross development value, or GDV, the aggregate open-market value of all the completed units, confirmed by a RICS valuation. Loan to value is usually quoted against that GDV, and the indicative ceiling sits around 70 to 75 percent. Because the loan is set against the finished value rather than residual build cost, an exit bridge can release equity from completed units that was previously locked up in the development loan, freeing cash for the developer's next scheme.

The figures below are illustrative only and are not an offer of finance. The actual loan to value, rate and fees depend on the asset, the location, the strength of the sales evidence and the developer's track record.

Sizing on GDV is what separates an exit bridge from the original development finance, which is drawn in stages against cost as the build progresses. Here the building is finished, the value is fixed by the valuer, and the loan is set against that proven value.

Retained, rolled and serviced interest across the sales period

Because completed but unsold units produce little or no income, the interest on a development exit facility usually has to be funded without monthly cash from the developer. There are three common approaches, and they are often combined as units begin to sell.

• Retained interest: the lender holds back an interest reserve from the advance to cover the term, so nothing is paid monthly and the reserve is settled at redemption.
• Rolled-up interest: interest is added to the loan balance each month and cleared in full when the facility is redeemed, protecting cash flow while units are unsold.
• Serviced interest: the developer pays the interest monthly from other income, which can lower the headline cost but needs dependable cash flow.

Over a sales period, retained and rolled-up interest both avoid a monthly outgoing while the scheme is selling, which suits a developer whose cash is tied up in stock. Serviced interest is generally cheaper in total because nothing compounds, but it depends on having the cash to pay it. We structure the interest around the expected sales runway so the facility carries itself until the units sell.

The sales-period runway and what happens if units sell slowly

Sales-period funding is set to a term that covers the marketing and sales period for the scheme, typically 12 to 18 months. That runway is the practical benefit of the product: it replaces a maturing development loan with a facility long enough to sell the units in an orderly way and at full value, rather than discounting to hit a hard maturity date.

If units do not sell within the term, there are normally two routes. The term can sometimes be extended to finish the sales, subject to the lender's agreement and the loan to value still being comfortable. Or the remaining stock can be moved onto a longer-term facility, for example a buy-to-let or commercial term loan if the developer decides to hold and let the unsold units rather than keep selling. We line up that fallback in advance so a slow sales period does not force a distressed exit.

Redeeming the post-completion bridge by sale or refinance

A post-completion bridge is redeemed in one of two ways. The first is redemption by sales: as completed units sell, the net proceeds repay the facility, usually under a part-release mechanism where each sale releases its unit from the charge and pays down the loan until the balance is cleared. The second is redemption by refinance: the developer refinances the whole scheme, or the unsold balance of it, onto a longer-term product such as a buy-to-let portfolio loan or a commercial investment term loan, and that new debt repays the bridge.

Most developers plan for redemption by sales and keep the refinance as a fallback, which keeps the exit flexible if the market slows. DevExit is a finance arranger and introducer, not a lender, and not authorised by the Financial Conduct Authority. We arrange and place development exit finance with the funder whose appetite fits the completed scheme, and any figures we quote are illustrative only and not an offer of finance.