Development Finance Exit Strategies: Planning Your Loan Repayment

In development finance, your exit strategy is not an afterthought; it is a foundational element of your loan application that directly influences the terms you receive, the leverage available, and even whether the lender approves your deal at all. The exit strategy answers the most fundamental question a lender asks: how will this loan be repaid? A clear, evidenced, and realistic exit strategy demonstrates that the developer has thought beyond the build phase and has a viable path to generating the revenue needed to redeem the facility.

Lenders evaluate exit strategies based on three criteria: certainty, speed, and evidence. A pre-sold scheme where 70% of units are exchanged before construction begins scores highly on all three counts, the sales are contractually committed, completion is time-bound, and the evidence is in the form of signed contracts. A speculative scheme relying on open-market sales post-completion carries more uncertainty, a longer expected timeframe, and relies on comparable evidence rather than committed purchases. The difference in how lenders price these two scenarios can be 100-200 basis points in interest rate and 5-10% in leverage.

We always advise developers to define their exit strategy before approaching any lender. This means having specific, evidenced plans for how each unit or the entire scheme will be disposed of, supported by comparable sales evidence, agent valuations, or letters of intent from buyers. Developers who present a clear exit strategy at the outset of the application process receive faster decisions and better terms. Those who are vague about their exit, or who change strategy mid-application, signal uncertainty that lenders interpret as additional risk.

Individual unit sales are the most common exit strategy for residential development finance in the UK. The developer builds the scheme, markets the completed units through estate agents, and uses the sales proceeds to repay the development loan. This approach offers the highest potential revenue because each unit is sold at open market value to an individual buyer, typically an owner-occupier or a buy-to-let investor.

The mechanics work as follows. As each unit is sold, the purchaser's solicitor remits the sale proceeds to the developer's solicitor, who uses those funds to make a partial repayment of the development facility. Most development lenders operate a release mechanism where they will release their charge over individual units upon receipt of an agreed minimum payment per unit. For example, on a 10-unit scheme with a £3 million facility, the lender might agree to release each unit upon receipt of £280,000, allowing the remaining £200,000 of proceeds per unit (assuming a £480,000 sale price) to flow to the developer after all units are sold and the loan is fully redeemed.

The risk with individual sales as an exit strategy is the sales period. In a strong market, units may sell within weeks of completion. In a slower market, the sales period could extend to 6-12 months or longer, during which time interest continues to accrue on the outstanding loan balance. On a £2 million outstanding balance at 8%, every additional month of sales costs approximately £13,300 in interest. Over a six-month extended sales period, that represents £80,000 of eroded profit. This is why lenders and brokers alike stress the importance of realistic sales assumptions and why we model extended sales scenarios in every development appraisal we prepare.

Refinancing is the appropriate exit strategy when the developer intends to retain the completed property as a long-term investment rather than selling it. The development loan is repaid by taking out a new long-term facility, typically a commercial mortgage or a buy-to-let mortgage, secured against the completed and income-producing asset. This approach is common for build-to-rent schemes, commercial developments with tenants in place, and mixed-use buildings where the developer wants to retain the rental income.

The viability of a refinance exit depends on the completed property generating sufficient rental income to service the new mortgage. Lenders offering term loans or commercial mortgages assess affordability based on the rent-to-interest coverage ratio, typically requiring rental income to cover at least 125-145% of the mortgage interest payment. On a completed scheme valued at £5 million with a rental income of £250,000 per annum, a commercial mortgage at 5.5% interest on a 65% LTV (£3.25 million) would require annual interest payments of approximately £178,750. The rental coverage ratio would be 140%, which satisfies most lender requirements.

The timing of the refinance exit is critical. The development lender's facility has a fixed term, typically 18-24 months, and the refinance must complete before the facility expires to avoid extension fees or default. We recommend beginning the refinance application at least three months before the development facility's maturity date. The development exit finance product has been specifically designed to bridge the gap between development completion and long-term refinance, providing a lower-cost holding facility while the term loan is arranged. This can save developers significant interest compared to extending the original development facility.

A bulk sale involves selling the entire development, or a significant portion of it, to a single buyer at a negotiated price. Common bulk buyers include housing associations (for affordable housing), institutional investors (for build-to-rent portfolios), and property companies seeking to expand their portfolios. The advantage of a bulk sale is speed and certainty: a single transaction replaces months of individual unit marketing, and the developer receives the full proceeds in one payment.

The trade-off is price. Bulk buyers typically negotiate a discount of 10-20% below the aggregate open market value of the individual units. On a scheme with a GDV of £4 million based on individual sales, a bulk sale might achieve £3.2 million to £3.6 million. Whether this represents a good outcome depends on the developer's specific circumstances. If the bulk sale eliminates six months of interest charges (£80,000 to £120,000), saves 1.5% of GDV in estate agent fees (£60,000), and avoids marketing costs (£20,000 to £30,000), the net position may be comparable or even favourable compared to individual sales.

Forward funding takes the bulk sale concept a step further by agreeing the sale before construction begins. The buyer, typically an institutional investor, commits to purchasing the completed scheme at a fixed price and funds the construction costs directly or through a structured arrangement with the developer. Forward-funded deals are most common in the build-to-rent sector, where institutional investors are willing to commit capital upfront in exchange for certainty of acquisition. From the developer's perspective, forward funding can eliminate or substantially reduce the need for development finance, as the investor's capital replaces bank lending. We explore this structure in detail in our guide on forward funding in property development.

The optimal exit strategy depends on the type of development, the target market, the developer's financial objectives, and the prevailing market conditions. Developers building standard residential housing in strong sales markets will almost always achieve the highest returns through individual unit sales. Developers building larger apartment schemes or purpose-built rental accommodation may find that a refinance or bulk sale delivers a better risk-adjusted return after accounting for sales costs and time.

Market conditions play a significant role. In a rising market with strong buyer demand, individual sales maximise revenue because each unit captures the latest market price. In a flat or declining market, a pre-agreed bulk sale provides certainty and eliminates the risk of price erosion during an extended sales period. We monitor market conditions across every region of the UK and advise our clients on the most appropriate exit strategy for the current environment.

It is also worth considering hybrid exits, where different portions of the scheme are sold through different channels. A developer might sell 60% of units on the open market at full value and pre-agree a bulk sale of the remaining 40% to a housing association at a discount. This blended approach captures the upside of individual sales while providing a safety net of guaranteed demand for a portion of the scheme. Many development lenders view hybrid exits favourably because they combine revenue maximisation with risk mitigation. To discuss which exit strategy best suits your project, submit your details through our deal room.

Your exit strategy directly influences three key loan parameters: the interest rate, the maximum leverage, and the loan term. Understanding these relationships helps you optimise your capital structure by selecting an exit strategy that aligns with your financial objectives while securing the best available terms.

Schemes with pre-sold or pre-let exits consistently achieve the best pricing. A developer with 50% or more of units pre-sold can expect interest rate reductions of 50-100 basis points compared to a fully speculative scheme. Similarly, leverage may increase by 5% LTGDV because the lender's exposure to sales risk is materially reduced. On a £5 million GDV scheme, 5% additional leverage represents £250,000 of additional debt that reduces the developer's equity requirement. Combined with a lower interest rate, the pre-sold developer saves £30,000 to £60,000 in total finance costs compared to an identical scheme without pre-sales.

Refinance exits can present challenges for development lenders because the repayment depends on the developer arranging a new facility with a different lender. If the long-term refinance falls through, the development lender is left with a completed but unoccupied building and an unredeemed loan. To mitigate this risk, some development lenders require evidence that a refinance has been agreed in principle before they will release the final construction drawdown. Others impose a higher interest rate or shorter loan term for refinance exits compared to sales exits. We navigate these lender preferences daily and can structure your application to present the exit strategy in the strongest possible light, maximising your chance of approval at competitive terms.