Development exit finance for completed homes and commercial schemes

Often yes, provided the scheme is finished or close to it, and acting quickly matters because charges keep growing. An exit lender treats it as refinancing a loan that is past its term. It values the completed units, reviews sales or letting progress and lends against that value, and the new loan has to repay the full redemption figure, including any default interest, extension fees and costs the current lender has added. If those charges have eaten into the equity, the shortfall may need to come from your own funds or extra security. Telling the current lender early that a refinance is under way can help, because a lender with a credible exit in sight may agree a short extension rather than take enforcement steps.

What is default interest on a development loan?

It is a higher rate of interest that the facility letter allows the lender to charge once the loan passes its repayment date or the borrower breaches its terms. It usually applies on top of, or in place of, the normal rate and is often added to the loan rather than paid monthly, so the debt grows faster. The letter may also allow extension and exit fees and the appointment of a receiver to sell the property. Read those clauses before the term ends, not after.

• Redemption statement. The full amount needed to clear the loan, with charges itemised.
• Facility letter. Default rate, fees and the lender's enforcement rights.
• Completion evidence. Building control sign off and warranties for each unit.
• Sales progress. Reservations, offers and agents' views on time to sell.

GOV.UK explains why buyers ask for building regulations approval certificates. If the build itself is unfinished, development continuation finance may fit better, and our page on refinancing one bridging loan with another covers short term debt that has run over. Instant Quotes lets a developer check which panel lenders could refinance an expired facility.

Possibly, but fewer lenders will consider it and they allow for the wait. In England a higher risk building, meaning one of seven storeys or at least 18 metres with two or more homes, cannot be lived in until the Building Safety Regulator has issued a completion certificate and the building has been registered with it. Until then nobody can move in, so buyers' mortgage lenders are unlikely to complete and no flat can be let. The regulator has 8 weeks to decide a valid application, longer if both sides agree in writing, and a rejected application has to be put right and resubmitted. An exit lender will want the application date, the regulator's queries and a term with enough headroom to cover a rejection.

What is a Gateway 3 completion certificate?

Gateway 3 is the final approval stage for higher risk buildings in England. The applicant shows that the finished work complies with building regulations, and the regulator compares it with the approved plans and the change log, inspects the building and approves or rejects it. A partial completion certificate is possible only where a partial completion strategy was submitted with the original building control application. If you disagree with the decision you can ask for a review and then appeal to a tribunal.

• Application. Date submitted and any queries raised by the regulator.
• Change log. How the finished building differs from the approved plans.
• Phasing. Whether a partial completion strategy was approved.
• Holding costs. Interest, insurance and security while flats stand empty.

GOV.UK explains applying for a completion certificate for a higher risk building. Our property development finance section covers the build stage, and a bridging loan may suit a block that exit lenders will not take until it is certified. Instant Quotes shows which panel lenders may look at a completed block awaiting sign off.

A development facility is priced for construction risk: a site that might not be finished, a contractor who might fail, costs that might overrun. Once the building is complete and signed off, that risk has gone, but the facility's pricing and term have not changed. Staying on it has three costs:

• Price. Interest and fees still reflect build risk on what is now a finished building.
• Time pressure. The facility term was set to the build programme plus a short sales period. New homes sell plot by plot, each waiting on a buyer's mortgage offer and often a chain; commercial units can take longer still, because buyers need finance and tenants negotiate lease terms.
• Trapped equity. The profit in the scheme sits in the building, while the next site needs a deposit now.

An exit loan replaces the development facility with one sized against the completed value, over a term long enough to market the units properly.

Exit lenders lend against a finished asset, so they want the evidence that it is finished. Expect them to ask for a practical completion certificate from the contract administrator, the building control completion certificate, connected and tested services, and a valuation of each unit. Many will consider a scheme with only minor snagging outstanding, sometimes holding back a retention until it is cleared.

For houses and flats, the structural warranty certificate for each plot, or a professional consultant's certificate where the scheme was built without a warranty, matters as much as building control sign-off. Buyers' mortgage lenders generally insist on one, so an exit lender relying on plot sales will check it before anything else.

For commercial units, energy performance needs particular care. Under the minimum energy efficiency standard for non-domestic lettings, a unit below the required EPC rating cannot generally be let, so a lender will check the EPCs before relying on a letting exit.

Selling units

Where units will be sold individually, the exit loan sets a release price for each one: the amount that must be repaid from that sale before the lender releases its charge on the unit. Release prices are usually set above a simple pro-rata share of the loan, so the debt falls faster than the stock of unsold units. Check the release schedule carefully, because it decides how much cash you see from early sales. VAT is a frequent surprise: the freehold sale of a new commercial building is normally standard-rated, as HMRC's VAT Notice 742 on land and property explains, which affects buyers who cannot recover VAT and your pricing. New homes are different: the first sale of a newly built dwelling by the developer is normally zero-rated, which is what allows VAT on the build to be recovered, as GOV.UK's guide to VAT for builders on houses and flats sets out.

Letting and holding

Where you plan to keep commercial units and let them, the exit loan is a stepping stone to a long-term commercial investment mortgage. That lender will look at lease length, tenant strength and the rent roll, so the exit term must allow enough time to sign tenants and let them trade for a period. Buyers who will occupy the units themselves usually fund their purchase with a commercial mortgage, and the pace of those approvals affects your sales timetable. If the plan for finished houses or flats is to hold and let them, the long-term refinance onto buy-to-let mortgages is not something we arrange, although an exit loan can still cover the period while you sell some or all of them.

Illustration only, with round hypothetical figures. A developer completes eight three-bedroom houses valued at £300,000 each, £2,400,000 in total. The development facility, with rolled-up interest, stands at £1,500,000 and expires next month. Two houses are reserved with buyers awaiting mortgage offers; the rest are on the market.

An exit lender agrees to lend £1,600,000 against the completed scheme. It repays the development facility in full and leaves £100,000, less fees, for the developer. The release price is set at £270,000 per unit, so each sale reduces the loan faster than its share of the debt. After six sales the loan is cleared, and the last two houses are free of borrowing and can be sold without pressure on price.

An exit loan buys time; it does not create demand. If units are priced above what the market will pay, the same problem returns when the exit loan reaches its term, now with more interest added. Releasing equity at completion is attractive but increases the debt the units must carry, and using it as a deposit on the next site ties two projects together. Personal guarantees are common. Before refinancing, ask whether a modest price reduction to secure the remaining sales would cost less than another period of interest and holding costs. If the build is not yet complete and the facility is struggling, continuation finance is the more relevant route.