Ground Up Commercial

The decision facing most borrowers is not whether ground up commercial exists but whether it is the cheapest way to hold risk for the period involved. In practice funding is drawn in stages against build progress rather than advanced in full at the outset.

Structurally, the facility is secured on a first charge over the site, supported by a debenture and personal or corporate guarantees, written over terms of nine to twenty-four months, aligned to the build programme plus a sales period, with typically up to 65% of gross development value, or 80% to 90% of total development cost, whichever bites first. Lenders assess the exit before the entry: the facility is repaid from unit sales or by refinancing the completed scheme onto investment or term debt. That ordering explains why two applicants with identical income can receive materially different terms — the credit question is whether the repayment route survives a slower market, not whether the borrower looks creditworthy today.

Activity in this segment comes from peer-to-peer and syndicated platforms, specialist development lenders, debt funds and institutional capital and challenger banks with construction desks. Each prices the same development finance case against its own funding cost and risk appetite, which is why the same ground up commercial case can attract offers several percentage points apart. The Financial Conduct Authority supervision shapes conduct standards and, where the borrowing is regulated, the advice and disclosure obligations that sit around the transaction.

Eligibility for ground up commercial is assessed on the asset first and the applicant second. Lenders test the appraisal — build cost, contingency, professional fees and end value — stress-tested against slower sales and cost inflation, then satisfy themselves that the facility is repaid from unit sales or by refinancing the completed scheme onto investment or term debt remains achievable under stressed assumptions. Trading history, sector, and the quality of the security all move the answer, and a marginal case is far more often declined on evidence gaps than on the underlying numbers.

A complete submission normally contains a detailed cost appraisal with contingency, the build programme and contractor details, a schedule of the developer's completed projects and an independent monitoring surveyor's initial report. Where any of these are missing, underwriters price the uncertainty rather than ignore it, so incomplete packs tend to return higher rates or lower advances rather than an outright refusal. Preparing the pack before approaching lenders is the single most effective way to protect the terms available.

Adverse credit, short trading history, or an unusual asset does not automatically exclude an applicant. It moves the case towards specialist development lenders and debt funds and institutional capital, where criteria are set case by case. The trade-off is cost: flexibility on criteria is almost always paid for in margin, fees, or a lower advance against value.

Pricing is built rather than quoted. The headline rate reflects a margin plus arrangement and exit fees, with interest charged only on funds drawn rather than on the full facility, and the effective cost only becomes visible once arrangement fees, valuation and legal costs, and any exit or early-repayment charge are added to the same calculation. Comparing two offers on rate alone routinely selects the more expensive facility.

Three variables move the price materially: the advance requested against value, the strength of the facility is repaid from unit sales or by refinancing the completed scheme onto investment or term debt, and the time the lender is exposed. Reducing the advance is usually the most efficient lever, because it lowers loss-given-default for the lender and therefore the margin charged. Figures discussed at enquiry stage are indicative and subject to valuation and full underwriting.

Borrowers should also price the cost of delay. Terms are typically issued within a week of a complete appraisal, with drawdown following legal and monitoring-surveyor sign-off in four to eight weeks. Where a transaction has a fixed deadline, a slightly higher margin from a lender that can meet the date is frequently cheaper than a lower margin that misses it and forfeits a deposit or a negotiated purchase price.

Consider a borrower using ground up commercial where an experienced developer funds several plots within one programme. The starting point is the security: an independent valuation establishes what the asset supports, and typically up to 65% of gross development value, or 80% to 90% of total development cost, whichever bites first sets the realistic ceiling on the facility. The gap between the ceiling and the funds required is the equity or additional security the borrower must contribute.

The facility is then sized against the appraisal — build cost, contingency, professional fees and end value — stress-tested against slower sales and cost inflation, and the term is set by the repayment route rather than by preference — the facility is repaid from unit sales or by refinancing the completed scheme onto investment or term debt. Costs are modelled across the full term, including arrangement and exit fees, so the comparison against alternatives is made on total cost rather than on headline rate.

This example is illustrative. It is not a quotation, a recommendation, or evidence of available terms; actual pricing depends on valuation, credit assessment, and the lender's appetite on the day. Its purpose is to show the order in which decisions are made, because borrowers who understand that sequence present far stronger applications.

Ground up commercial is most commonly used where an existing building is converted to a new use under permitted development, a partially built scheme requires a developer exit facility and a heavy refurbishment involves structural change or extension. What these situations share is a mismatch between the timing of a cost and the timing of the funds that will meet it; the facility exists to bridge that mismatch at a known price rather than to fund an indefinite shortfall.

A second group of cases is structural rather than urgent: an experienced developer funds several plots within one programme and a site with planning consent is built out for open-market sale. Here the borrower is choosing how to hold an asset over time, and the analysis is closer to a capital-structure decision than a funding emergency. Term, covenant flexibility, and early-repayment terms matter more than speed.

The route is a poor fit where the repayment plan depends on an event outside the borrower's control, or where the underlying business needs additional working capital rather than secured borrowing. In those cases the honest answer is that ground up commercial would refinance a problem instead of resolving it.

The nearest alternatives are a commercial mortgage once the scheme is complete and income-producing, a bridging facility where works are cosmetic rather than structural and a developer exit facility to reduce cost once the scheme is watertight. Each solves a slightly different problem: some are cheaper but slower, others are faster but priced for short exposure, and a few avoid taking a charge over the asset altogether. The right comparison is total cost over the period the money is actually needed.

Where the requirement is short and the exit is certain, a short-dated facility usually wins on total cost even at a higher rate, because the interest is charged for months rather than years. Where the asset is held for the long term and the income is stable, the opposite is true and a term facility priced on a margin plus arrangement and exit fees, with interest charged only on funds drawn rather than on the full facility is the cheaper way to hold the position.

A broker or adviser adds most value at this point rather than at application. Comparing specialist development lenders, debt funds and institutional capital and challenger banks with construction desks on a like-for-like basis, including fees and exit terms, is the step that determines the cost of the transaction — the paperwork that follows is largely administrative.

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