Equity Contribution in Development Finance: Cash, Land or Both

Equity in the context of development finance is the portion of total project costs that the developer funds from their own resources, rather than from borrowed money. It is the developer's financial stake in the project, and it serves as the primary loss-absorption layer for the lender. If the development underperforms, the developer's equity is eroded before the lender suffers any loss. This is why every development lender requires a minimum equity contribution, typically ranging from 10% to 40% of total project costs depending on the lender, the borrower's track record, and the overall risk profile of the scheme.

What many developers do not realise is that equity does not have to be cash sitting in a bank account. While cash is the simplest form of equity and is universally accepted by lenders, there are several alternative forms that can partially or fully satisfy the equity requirement. These include the value of land you already own, planning uplift on a site, retained profits from previous developments held within your SPV, and in some cases the value of professional services or project management expertise you contribute to the scheme. Understanding which forms of equity your target lender will accept is critical to structuring your deal efficiently.

In our experience arranging development finance across the UK, approximately 60% of the deals we structure involve non-cash equity in some form. The most common is land equity, where the developer owns the site outright or has an existing mortgage that can be refinanced into the development facility. The second most common is planning uplift, where the increase in site value attributable to a planning consent is recognised as equity. Both approaches allow developers to reduce their cash outlay and deploy capital more efficiently across multiple projects.

Land value is the most widely accepted alternative to cash equity in UK development finance. If you purchased a site for £600,000 and the current market value is £600,000, the lender will recognise that £600,000 as your equity contribution toward the project. The development facility will then cover the construction costs, professional fees, and other project expenses up to the lender's maximum leverage ratio. In this scenario, if total project costs are £2 million and the lender funds 70% (£1.4 million), your land value of £600,000 exactly fills the equity requirement.

The critical nuance is that lenders assess land equity at current market value, not at your purchase price. If you bought the site for £400,000 three years ago and it is now valued at £650,000, you benefit from £250,000 of unrealised appreciation that counts toward your equity. Conversely, if you overpaid and the site has depreciated, the lender will use the lower current value. This is why obtaining an independent RICS valuation before approaching lenders is advisable. It eliminates surprises and gives you a clear picture of your equity position.

One structuring technique we frequently use involves developers who own land with an existing mortgage. If the site is worth £800,000 with a £300,000 mortgage, the developer has £500,000 of net equity. The development lender pays off the existing mortgage as part of the day-one drawdown and registers their own first charge. The £500,000 of net equity is then credited as the developer's contribution. This approach is seamless and avoids the developer needing to find separate cash to discharge the existing mortgage. For developers who acquired their site using a bridging loan, the same principle applies: the development lender redeems the bridge and the developer's equity is the difference between site value and the bridge balance.

Planning uplift is the increase in land value that occurs when a site receives planning permission for development. A one-acre plot of agricultural land in Surrey might be worth £50,000 per acre without planning, but with residential planning permission for 10 houses, the same acre could be worth £2 million or more. This dramatic increase in value represents planning uplift, and some development lenders will recognise it as part of the developer's equity contribution.

Not all lenders accept planning uplift as equity, and those that do apply varying rules about how it is calculated and recognised. The most generous approach is to value the site at its current market value with planning permission and treat the full value as equity. Under this approach, a developer who purchased agricultural land for £100,000 and obtained planning consent that increased the value to £1.5 million would have £1.5 million of equity, despite only investing £100,000 of cash. This is an extremely powerful leverage tool that allows developers to take on projects far larger than their cash reserves would otherwise permit.

However, more conservative lenders will cap the equity recognition at the developer's actual cost basis, meaning they only credit the £100,000 cash invested, regardless of the site's current value. Others take a middle ground, recognising the full current value but applying a higher minimum equity percentage to compensate for the fact that the developer has limited cash exposure. We navigate these differences daily and can identify which lenders on our panel offer the most favourable treatment of planning uplift for your specific situation. Submit your site details through our deal room and we will assess your equity position across multiple lenders.

Despite the various forms of non-cash equity available, there are situations where lenders require a cash deposit as part of the equity contribution. First-time developers are the most common example. Lenders want to see that a new developer has genuine financial commitment to the project, and land value alone may not satisfy this requirement. A typical first-time developer might be asked to contribute 25-35% of total project costs in cash, even if they own the site outright. On a project with £1.5 million of total costs excluding land, that represents a cash requirement of £375,000 to £525,000.

The source of cash equity matters to lenders. Funds must be demonstrably legitimate and traceable, in compliance with anti-money-laundering regulations. Lenders will typically request six months of bank statements and may ask for evidence of how the funds were accumulated, whether through savings, property sales, business profits, or inheritance. Cash that has recently appeared in your account without a clear source will delay or derail your application. We advise clients to prepare their equity evidence well in advance of applying.

For developers who lack sufficient cash equity, equity joint ventures provide a well-established solution. An equity partner, whether a private investor, a family office, or a specialist property equity fund, contributes the required cash in exchange for a share of the development profit. Typical profit splits range from 40/60 to 50/50 in favour of the developer, depending on how much of the project value the developer contributes through expertise, planning consents, and project management. The cost of equity is variable and performance-linked, which can make it more or less expensive than mezzanine debt depending on how the project performs. For a detailed comparison, see our guide on mezzanine versus equity joint ventures.

The most successful developers treat equity management as a core strategic discipline rather than a secondary concern. The goal is to maximise the number of projects you can pursue simultaneously by deploying your available equity as efficiently as possible across your portfolio. This requires understanding exactly how much equity each project demands and structuring each deal to minimise the cash requirement.

One approach we frequently recommend is the recycling strategy. A developer with £500,000 of cash equity uses it as the deposit on Project A. As Project A progresses and units begin to sell, the developer receives sales proceeds that can be deployed as equity into Project B, even while Project A is still completing. This sequential recycling of equity allows a developer to run two or three projects overlapping, rather than waiting for each one to complete before starting the next. The key constraint is cash-flow timing: the sales from Project A must materialise before the equity is needed for Project B.

Another strategy involves using mezzanine finance to reduce the equity requirement on individual projects, thereby stretching the available equity across more deals. If you have £1 million of cash and each project requires £500,000 of equity, you can run two projects simultaneously. But if mezzanine finance reduces the equity requirement to £250,000 per project, you can run four. The mezzanine interest reduces your margin per project, but the portfolio-level return may be significantly higher because you are generating profit from four projects rather than two. We have helped developers triple their annual project volume through this approach, and we explore the portfolio concept further in our guide on portfolio development finance.

The most common mistake we encounter is developers who overestimate their equity position. A developer might claim £800,000 of equity based on their purchase price for a site, but the lender's independent valuation comes back at £650,000, creating a £150,000 shortfall that must be filled with cash at short notice. To avoid this, always obtain a pre-application valuation from a RICS surveyor before committing to a funding structure. The cost of a desktop valuation (£500 to £1,500) is trivial compared to the disruption of discovering an equity shortfall mid-application.

Another frequent error is failing to account for all the costs that must be funded from equity. While the headline equity percentage might be 20% of total project costs, the developer also needs to fund application fees, valuation costs, legal fees, and potentially several months of holding costs before the first drawdown. On a £3 million project, these pre-drawdown costs can total £50,000 to £100,000 on top of the formal equity requirement. Cash-flow modelling that includes these costs is essential to ensure you are not caught short at the point of commitment.

Finally, we see developers who contribute equity in a form that does not match the lender's requirements. A developer might offer their £200,000 equity as a second charge over another property, only to discover that the lender requires cash or land equity within the development SPV. Each lender has specific rules about acceptable equity forms, and these should be confirmed in writing before you invest time and money in the application process. We verify equity acceptability with every lender before recommending them for a deal, ensuring our clients never face last-minute surprises.