How build to rent development finance works

How build to rent development finance works

Build to rent development finance is a short-term facility that funds the period between buying the land and stabilising the finished scheme. Unlike a term loan on an income-producing property, it lends against something that does not yet exist and earns nothing while it is being built. That is why the structure is different: the loan is drawn down in stages as the scheme rises, interest is usually rolled up rather than paid each month, and the whole facility is repaid in one event when the scheme reaches stabilisation and the developer exits.

The lender begins with two appraisal numbers. The total development cost is land, build cost, professional fees, finance costs and contingency. The gross development value, or GDV, is what the finished, let scheme is worth. The loan is then capped at the lower of a percentage of cost, the loan to cost (LTC), and a percentage of value, the loan to GDV (LTGDV). Senior debt commonly reaches around 60 to 65% loan to cost or about 70 to 75% loan to GDV, whichever bites first, and the developer funds the rest as equity.

Drawdowns and the monitoring surveyor

A development facility is not handed over in one lump. The land element is usually advanced at the start, then the build cost is released in drawdowns as work is completed and certified. This protects the lender, because money only follows value into the ground, and it keeps the developer's interest bill down, because interest accrues only on what has actually been drawn.

An independent monitoring surveyor acts as the lender's eyes on site. Before each drawdown the monitor inspects progress, checks the spend against the cost plan and confirms the scheme remains on budget and on programme, then signs off the release. A fixed-price build contract with an experienced main contractor makes this process smoother and gives the lender confidence that the cost to complete is contained. We make sure the cost plan and contractor information are in order before an application goes in, because a credible build budget is as important to a lender as the value of the finished homes.

Loan to cost and loan to GDV in practice

The two leverage tests do different jobs. Loan to cost measures the debt against what the scheme costs to deliver and protects the lender against a thin equity cushion. Loan to GDV measures the debt against what the finished scheme is worth and protects the lender against an over-optimistic value. A lender applies both and lends the lower of the two, so a developer needs to know which one binds. On a high-value scheme in a keen market, loan to cost usually bites first; on a tighter-margin scheme, loan to GDV can be the limit.

Where senior debt alone does not provide enough leverage, a developer can add a mezzanine layer or bring in equity. Mezzanine sits behind the senior lender, stretches total leverage to around 80 to 90% loan to cost and carries a higher coupon to reflect the subordinated risk. We model the blended cost of the senior and mezzanine layers together, because the headline senior rate is only part of the picture once a junior tranche is added.

From practical completion to stabilisation

Reaching practical completion, when the building is finished and signed off, is not the end of the story for a build-to-rent scheme. The homes still have to let up to a stable occupancy, and only then does the scheme produce the income that supports long-term debt. That lease-up phase, ending in stabilisation, is a distinct risk that the finance has to bridge. A multifamily block lets up in one wave; a single-family estate can let in phases as homes complete.

Many developers use development exit finance to cover this period. It is a cheaper term facility taken at practical completion that repays the development loan and lowers the cost of carry while the scheme lets up. Because the building risk is gone, the margin is lower than on development finance, which improves the developer's position before the final refinance or sale. We arrange the exit facility alongside the development loan so the transition is planned, not improvised.

The exit: sale, forward sale or refinance

Every development facility is underwritten to a credible exit, and a lender will scrutinise it as hard as the build. There are three main routes. A sale of the completed, stabilised block to an investor repays the debt and crystallises the developer's profit. A forward sale, agreed before completion at a fixed price or yield, removes sale risk because the buyer is locked in. A refinance moves the scheme onto long-term investment finance sized on the stabilised net operating income, letting the developer or investor hold the asset for income.

The exit chosen shapes the whole deal. A forward sale or forward funding arrangement secured at the outset gives the development lender great comfort and can improve the terms, because the buyer and price are known. A speculative build with no committed buyer carries more risk and is underwritten more cautiously. We help structure the exit early, whether that is finding a forward funder, arranging the term refinance or positioning the scheme for sale.

A note on regulation

Build to rent development finance is unregulated commercial lending to a development business and falls outside the FCA mortgage perimeter. We act as an arranger and introducer and do not lend. Any regulated case is referred to an authorised firm, and all figures here are indicative and never an offer of credit.