Loan to Cost (LTC)
The facility measured against total eligible development cost. Lenders define eligible costs differently, so the calculation should be checked against the proposed term sheet.
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DEVELOPMENT FINANCE GUIDE
Development Finance: Structure, Leverage, Drawdowns & Lender Criteria
A practical guide for real estate developers and sponsors preparing a development finance process in the Netherlands, Spain or wider European markets.
What is development finance?
Development finance is capital used to fund the acquisition, construction, conversion or redevelopment of real estate. A facility may cover part of the acquisition price, construction costs, professional fees, interest, contingencies and other eligible project costs.
Unlike stabilised investment finance, development lending is underwritten against both the current position and the future business plan. Lenders therefore focus on cost-to-complete, permits, sponsor equity, projected value, execution capability and the route to repayment.
The appropriate capital structure can range from conventional senior development debt to stretch senior, whole-loan, mezzanine, preferred equity or joint-venture capital.
LTC · LTV · GDV · EQUITY
Core development finance metrics
Loan to Value (LTV)
Debt measured against the relevant property value. During development this may be tested against current value, projected completed value or both.
Gross Development Value (GDV)
The estimated market value of the completed development, normally supported by an independent valuation.
Sponsor Equity
Cash or qualifying value contributed by the sponsor. Lenders assess the amount, source, timing and whether equity is invested before or alongside debt.
Cost to Complete
The remaining capital required to complete the project, including an appropriate allowance for contingencies and committed but unpaid costs.
Exit Coverage
The lender will test whether sales, refinance or another defined exit can repay principal, interest, fees and any required reserves.
CAPITAL STRUCTURE
What can a development facility fund?
DRAWDOWNS
How development finance drawdowns normally work
Before first utilisation, lenders usually require agreed conditions precedent such as security documents, equity evidence, valuation, insurance, planning information and a final development budget.
Construction funding is then released in stages. An independent monitoring surveyor or technical adviser may verify works completed, remaining cost and compliance with the approved budget before each drawdown.
The order in which sponsor equity and debt are invested varies. Some structures require equity to be invested first; others fund on a defined pro-rata basis. The agreed mechanics should be clear before closing.
LENDER READY
Typical lender-ready information
Project & Business Plan
Development description, programme, target market, sales or letting strategy and clearly defined exit.
Development Appraisal
Acquisition cost, build costs, professional fees, finance costs, contingency, projected revenue or value and profit sensitivity.
Planning & Permits
Relevant planning consents, building licences and conditions that can affect commencement or completion.
Valuation
Independent support for current value and, where relevant, projected completed value or GDV.
Sponsor Information
Ownership structure, track record, financial capacity, source of equity and experience with comparable projects.
Construction Package
Contractor information, build contract, cost plan, programme, technical reports and project-monitoring information.
UNDERWRITING
What lenders focus on beyond leverage
Planning Risk
Whether the project can start and proceed under the required planning and licensing framework.
Construction Risk
Budget certainty, contractor strength, procurement route, contingencies and programme.
Sponsor Capability
Relevant track record, financial capacity, decision-making structure and alignment through equity.
Market Risk
Demand, pricing, absorption, rental assumptions and evidence supporting the projected exit value.
Security
Mortgage or first-ranking security, share pledges, account control and other transaction-specific security.
Exit
A credible and sufficiently evidenced route to repay the development facility within the agreed term.
MARKETS
Netherlands, Spain and cross-border execution
Netherlands
Dutch development lenders typically scrutinise valuation, cost plan, permits, sponsor equity, execution risk and the route to sales or stabilised refinance.
Spain
Spanish development finance places particular emphasis on legal and planning status, licences, sponsor equity, construction budget and, depending on the lender and project, pre-sales or other demand evidence.
European Capital
Cross-border debt funds and private credit can widen the capital universe where the transaction requires different leverage, speed or structural flexibility.
FAQ
Development finance questions
How much equity does a developer need?
There is no single market-wide percentage. The required equity depends on lender policy, land value, eligible project costs, leverage, sponsor strength, planning status, development risk and exit. The relevant tests are usually LTC, LTV or GDV-based leverage together with minimum sponsor commitment.
Is LTC the same as LTV?
No. LTC measures debt against eligible development cost, while LTV measures debt against a property value. A lender may apply both tests and the lower debt capacity can become the binding constraint.
Can interest be included in the facility?
Yes, some development facilities include an interest reserve or allow interest to roll up. The exact treatment depends on lender terms, projected cash flow, leverage and the required repayment profile.
Are pre-sales always required?
No. Pre-sale requirements vary by lender, jurisdiction, product, leverage, sponsor and market conditions. Some lenders may require a minimum level of pre-sales while others can underwrite alternative evidence of demand or use a different capital structure.
Can a project be financed before all permits are in place?
Sometimes, but this depends on the remaining planning risk and the lender mandate. A land or bridge facility may be more appropriate before full development finance becomes available.
What happens if construction costs increase?
Lenders normally expect sufficient contingency and a clear mechanism for cost overruns. Depending on the documents, additional costs may need to be funded by the sponsor before further debt is drawn.
What is a monitoring surveyor?
An independent technical adviser appointed or relied on by the lender to review the budget, programme, works completed and remaining cost before or during construction drawdowns.
How is a development loan repaid?
Common exits are unit sales, sale of the completed asset, or refinancing into a stabilised investment facility. The intended exit should be credible at the start of the financing process.
PRACTICAL LENDER QUESTIONS
Additional execution and structuring considerations
What if construction has already started?
Disclose which permits applied, what work has been completed, who paid for it, existing liabilities and the independently verified cost to complete. Started works may affect lender eligibility, security and drawdown requirements.
What if the contractor has not been appointed?
Provide a credible procurement plan, priced scope, contractor alternatives, programme and contingency. Lenders may condition approval or utilisation on an acceptable signed contract and technical due diligence.
Can financing close before an acquisition-payment deadline?
Test the actual completion date against credit approval, legal diligence, valuation, permits, equity verification, security documentation and conditions precedent. An indicative term sheet is not available funding. KSCG reviews the critical path and whether a bridge or phased structure is feasible.
What is the difference between an indicative term sheet, conditional approval and funding?
An indicative proposal outlines potential terms but is not a commitment. Conditional credit approval or an executed facility may still require satisfaction of stated conditions before utilisation. KSCG tracks outstanding conditions and the earliest realistic drawdown date.
How do fixed-price contracts, variations and cost overruns affect lender appetite?
Check whether a lump-sum price genuinely covers the complete scope, or whether indexation, provisional sums, exclusions, variations or escalation can change costs. Lenders may require greater contingency, additional verified sponsor liquidity or cost-overrun support. The project cash-flow model must reflect the timing of construction payments and lender drawdowns.
What does independent technical monitoring cover in Spain?
Depending on the lender, an external technical adviser may review the construction budget, contractor capability, programme, progress, remaining cost and drawdown certificates. The sponsor should clarify appointment, monitoring fees and responsibilities before finalising sources and uses.
How should Spanish valuations be commissioned?
Indicative market appraisals, residual land calculations, as-is and as-completed valuations and formal tasaciones serve different purposes. An initial valuation can support the first financing assessment. Before ordering a full report, ask KSCG to confirm the proposed lender's accepted valuer, required basis and whether the lender appoints its own expert to avoid duplicate costs.
What borrower structure is used for Spanish development finance?
KSCG's Spanish development-finance route generally expects a Spanish S.L. project company, potentially owned by an overseas holding company, subject to lender and legal review. KSCG can introduce Spanish lawyers and notaries for incorporation and structuring; legal and notarial advice is provided by those professionals. This is not a statement that Spanish law requires every development to use an S.L.
When can mezzanine, preferred equity or a joint venture help?
Only after verifying the true funding gap, sponsor contribution, senior lender restrictions, security ranking, intercreditor arrangements, cost of capital, potential dilution and exit coverage. Additional leverage does not guarantee an executable transaction.
What security may be required?
Depending on the lender and jurisdiction, this can include first-ranking mortgage security, share pledges, account control, assignments, guarantees or completion support. Existing encumbrances and legal enforceability must be checked before lender engagement.
KSCG
Development Finance advisory
For transaction-specific structuring, lender selection and execution, see KSCG’s Development Finance service.
Preparing a development financing?
KSCG can review the project, leverage, capital structure, lender universe and execution requirements before a formal market approach.
Discuss a development financing→