If you are funding a development scheme and you have not explored senior debt properly, there is a good chance you are paying more than you need to. It is the lowest cost form of development finance available in the market and for developers who qualify, it is almost always the right starting point.
Here is what it is, why it is priced the way it is and what you need to have in place to access it.
Why senior debt is the cheapest option
Senior debt sits at the base of the capital stack. It is a first charge loan, meaning the lender has first claim over the asset if anything goes wrong. That security is why senior debt is priced lower than mezzanine or equity finance. The lender carries less risk, so the cost to the borrower is lower.
For most residential development schemes, senior debt will cover between 60% and 65% of the gross development value and up to around 80% to 85% of total costs, depending on the deal and the lender. Interest rates are typically lower than any other development finance product, which on a scheme running 18 to 24 months makes a meaningful difference to the numbers.
Getting this layer of the capital stack right from the start sets the tone for everything else. The cheaper your senior debt, the less pressure there is on the rest of the structure.
What lenders are looking for
Senior debt lenders are not taking a view on whether property is a good investment. They already know it is. What they are assessing is whether your specific scheme is one they want to be behind, and whether you are someone they trust to deliver it.
These are the things that consistently determine whether a senior debt application gets approved and on what terms.
Full planning permission
Most senior debt lenders will not move without it. Outline planning is not enough and permitted development can work in some cases, but full detailed planning consent is what gives a lender confidence that the scheme is deliverable. If you are still at planning stage, it is worth having early conversations with a broker about what your options look like, but the facility itself will typically not be agreed until permission is in place.
A credible cost schedule
Lenders apply serious scrutiny to cost schedules. One that has been prepared by a quantity surveyor or an established contractor, with contingency clearly built in, signals that you know what the build is actually going to cost. A schedule that looks like it was put together in a spreadsheet over a weekend will raise questions and slow everything down. Most lenders want to see contingency of at least 10% to 15% of build costs. If it is not there, expect to be asked about it.
Comparable track record
This is where a lot of developers run into difficulty. Lenders want to see that you have done something similar before, not just that you have done development. A developer with experience completing smaller conversions applying for a 20 unit ground up scheme will face questions about whether that experience transfers. The strongest applications address this directly with a detailed developer CV that shows comparable completed projects, values, timeframes and outcomes. If your track record is still building, there are lenders who will work with you but the terms will reflect that and the structuring needs to be right.
A clear exit strategy
How the loan gets repaid matters as much to a lender as how it gets drawn. The two most common exits are sale of the completed units or refinance onto a longer term investment facility. Whichever route you are planning, lenders want to see it evidenced. For a sales exit that means comparable sold prices in the area. For a refinance exit that means evidence that the completed scheme will support the level of debt on a buy to let or commercial mortgage.
The right professional team
Architect, structural engineer, project manager, solicitor, etc. Lenders want to see that you have qualified people around you before they agree to fund your scheme. A developer without a professional team in place will find that most lenders will not be willing to progress until one is assembled.
Where Merryoaks comes in
The senior debt market is active and lenders are competing for great projects. Getting in front of the right ones with an application that is packaged properly, is what determines the terms you walk away with. We have arranged over £274 million in property finance since 2021 across hundreds of schemes and know which lenders are the right fit for which deals.
If you want to talk through whether your deal qualifies, get in touch with the team.
.avif)
.avif)
