The usual structure
Most development facilities are structured so that the borrower’s equity goes in first, either wholly or in a stated proportion, before the debt begins to draw. Land is frequently funded separately or partly, and the construction facility then draws in stages against certified progress.
The logic from the lender’s side is straightforward. If the borrower has already committed their own money, they have every incentive to finish, and the lender’s exposure begins against an asset that already has value in it.
The logic is sound and the consequence for the developer is a cash flow that is front loaded in a way appraisals often understate.
The proportions vary with the lender, the loan to value and the strength of the borrower, and they are negotiable in a way that developers frequently do not test. The structure offered in a first term sheet is a starting position rather than a fixed feature of the market.
What it does to the appraisal
A residual land valuation tells you what you can pay for the site. It does not tell you when you have to pay for anything, and two schemes with identical residual values can have very different peak equity requirements depending on the funding structure.
Peak equity, meaning the largest amount of your own money exposed at any one moment, is the constraint that actually limits how many schemes you can run at once. It is worth modelling explicitly rather than deriving it after the facility is agreed.
This is also why two developers can look at the same site and reach different answers honestly. Their cost of capital and their equity position are different, and the site is genuinely worth more to one of them.
Interest treatment matters too. Where interest is rolled up into the facility rather than serviced monthly, it consumes headroom that would otherwise fund construction, and a programme extension therefore reduces the money available to build with. Where it is serviced, it is a cash requirement during the works and belongs in the equity model.
Certified value is the gate
Once the debt begins drawing, each drawdown is released against certified progress rather than against expenditure. That distinction catches people out, because money spent on materials not yet incorporated, or on advance payments to specialists, may not be certifiable.
A contractor requiring payment for off site fabrication, on a facility that only funds work in place, produces a gap the developer funds themselves. It is manageable when anticipated and painful when discovered.
The mechanics of the certification cycle are set out in drawdown certification explained.
Where it goes wrong
The recurring failure is a timing mismatch between what the contract obliges the developer to pay and what the facility will fund. Contract payment terms and facility drawdown terms are negotiated separately, frequently by different advisers, and nobody reconciles the two documents.
A contract requiring payment within a short period, on a facility with a longer drawdown cycle, means the developer bridges the difference every month from their own resources. Across a two year build that is a substantial and entirely avoidable commitment.
The reconciliation takes an afternoon and it has to happen before both documents are signed, not after.
Land, and how it is funded
The land purchase is frequently financed separately from the construction works, either by a bridging facility, by a land loan from the same lender, or entirely from equity. Which of those applies changes the equity profile more than anything else in the structure.
Where the land is funded, the lender is taking security against an asset whose value depends on a scheme that has not been built, so the advance is conservative and the balance is equity. Where it is not funded at all, the whole purchase price is equity committed before a brick is laid.
It is also the point at which the residual land value calculation stops being theoretical. A figure that looked acceptable in an appraisal becomes a cash requirement on a completion date, and the two are separated by however long it takes to arrange the construction facility.
What this means for you
Model peak equity rather than total equity, and model it against the actual drawdown mechanics rather than against a smooth curve.
Before signing, put the building contract payment terms and the facility drawdown terms side by side and check that the second can fund the first. Where they do not align, one of them has to move, and the time to move it is now.
We look at that alignment as part of the commercial work described on our client side quantity surveyor page, and from the funding side under development monitoring surveying where the instruction comes from a lender.
Where a scheme is one of several running at once, the peak equity position across the portfolio is the number that actually constrains the business, and it is rarely modelled. Two schemes whose peaks coincide can require more capital together than either was assessed as needing alone.