Equity Requirements for Development Finance: How Much Do You Need

Equity in the context of development finance refers to the funds you contribute to the project from your own resources, as distinct from borrowed money. It is the developer’s financial skin in the game, and it serves two critical purposes. First, it reduces the lender’s exposure to the project, directly lowering their risk. Second, it demonstrates the developer’s financial commitment, aligning the developer’s interests with the lender’s because both parties have capital at risk. The more equity you contribute, the more confidence the lender has that you are genuinely committed to delivering a successful project.

The equity requirement is typically expressed as a percentage of the total project cost or, more commonly, as the inverse of the loan-to-GDV ratio. If a lender offers 65% of GDV, the developer needs to fund the remaining 35% of the project cost from equity. On a scheme with a GDV of £3,000,000 and total costs of £2,400,000, a 65% LTGDV facility provides £1,950,000, leaving the developer to contribute £450,000 from equity. That £450,000 might cover part of the land cost, stamp duty, professional fees, and a portion of the build costs that are not covered by the loan.

It is important to distinguish between the equity requirement and the cash deposit. Not all equity needs to come from cash savings. Equity in an existing asset, such as a site you already own outright, counts toward your equity contribution. Retained profits from previous developments, funds from an investment partner, or the discounted purchase price if you are buying below market value can all form part of your equity. Understanding what counts as equity and how to present it effectively is one of the most important aspects of structuring a successful development finance application.

The equity requirement varies significantly depending on the lender, the scheme, and the developer’s experience. Senior debt from mainstream lenders typically funds up to 60-65% of GDV, requiring the developer to provide 35-40% of the total project cost as equity. For experienced developers with a track record of successful projects, some lenders will stretch to 70% of GDV, reducing the equity requirement to around 30% of costs. First-time developers can generally expect to need 40-50% equity, reflecting the additional risk associated with inexperience.

For larger schemes above £5,000,000 GDV, some institutional lenders offer higher leverage, funding up to 75% of GDV through senior debt alone. These facilities are typically reserved for developers with institutional-grade track records and strong balance sheets, and the schemes must have low planning risk and proven demand. At the other end of the market, smaller specialist lenders may cap their exposure at 55-60% of GDV, particularly for niche property types or secondary locations, requiring the developer to contribute a larger equity share.

To illustrate with real numbers: on a ten-unit residential scheme in Surrey with a GDV of £4,500,000 and total costs of £3,600,000, a senior debt facility at 65% LTGDV would provide £2,925,000. The developer needs to fund the remaining £675,000 from equity. If the developer has purchased the land for £1,200,000 with £800,000 of their own cash and a £400,000 deposit, the land equity of £800,000 exceeds the requirement. However, if the land is being purchased with the facility, the developer needs to demonstrate £675,000 in cash or other qualifying equity before the lender will proceed.

Cash in the bank is the most straightforward form of equity and the easiest for lenders to verify. The lender will want to see bank statements showing the required amount in accounts you control, typically evidenced over the most recent three months. If the cash has recently been received, the lender will ask about its source to satisfy anti-money laundering requirements. Cash from savings, business profits, property sales, or family wealth are all acceptable sources provided they can be evidenced with a clear paper trail.

Land or property equity is the most common non-cash form of equity in development finance. If you already own the development site and it is worth £500,000 with no mortgage, that £500,000 counts as equity in your project. Similarly, if you purchased the land for £400,000 with a £250,000 deposit and a £150,000 bridging loan, your equity is £250,000 plus any subsequent increase in land value. Lenders will verify land equity through an independent valuation, so be aware that the equity value is based on the valuer’s assessment of current market value, not your purchase price or your own estimate.

Profit from the development itself can also contribute to equity, though this is more nuanced. If you are developing in phases, the profit from completed and sold units in Phase 1 can be recycled as equity for Phase 2. Some lenders also accept projected profit from pre-sold units as a form of equity contribution, although this is lender-specific and typically only available for schemes with exchanged contracts on units. Third-party equity from joint venture partners is acceptable provided the partnership is properly documented and the lender is satisfied with the partner’s credentials. For more on partnership structures, see our guide on joint borrower development finance.

Mezzanine finance is a secondary loan that sits between the senior debt and the developer’s equity, effectively reducing the amount of cash equity the developer needs to contribute. A typical structure might involve senior debt at 60% of GDV and mezzanine at 15% of GDV, bringing total leverage to 75% and reducing the developer’s cash equity to 25% of total costs. For a scheme with £3,000,000 GDV and £2,400,000 total costs, this means the developer needs £600,000 of equity instead of £960,000 under a senior-only structure.

Mezzanine finance comes at a cost. Interest rates on mezzanine are typically 12-18% per annum, significantly higher than senior debt rates of 7-10%. Arrangement fees of 2-3% are also standard. The total cost of a combined senior and mezzanine structure is therefore higher than a senior-only facility, and this additional cost must be reflected in your development appraisal. In our experience, mezzanine is most effective for schemes with strong profit margins of 25% or more on GDV, where the additional finance cost can be absorbed without compressing returns to unacceptable levels.

Not all lenders are comfortable with mezzanine structures, and the senior lender must specifically approve the presence of mezzanine debt. The mezzanine lender’s charge ranks behind the senior lender’s charge, meaning the senior lender gets repaid first in any recovery scenario. This inter-creditor arrangement is documented in an intercreditor deed, which sets out the respective rights of each lender. We arrange combined senior and mezzanine structures regularly and manage the coordination between both lenders to ensure the process is smooth. For a comparison of mezzanine and other stretch funding options, see our guide on mezzanine versus equity joint ventures.

Joint venture equity partnerships offer an alternative to mezzanine finance for developers who want to reduce their cash equity requirement. In an equity joint venture, an investor provides a portion of the equity in exchange for a share of the development profit. Unlike mezzanine finance, which charges a fixed interest rate, equity JV returns are profit-linked, meaning the investor does better when the project performs well and bears downside risk alongside the developer.

A typical equity JV structure for a development finance deal might see the developer contributing 10-15% of total costs from their own resources while the equity partner provides the remaining equity requirement, say 20-30% of total costs. In return, the equity partner receives 40-60% of the developer’s profit share, depending on the negotiated terms. On a £3,000,000 GDV scheme generating £600,000 of developer profit, an equity partner who contributed £600,000 of equity and receives a 50% profit share would earn £300,000, representing a 50% return on their investment over a twelve-to-eighteen-month project cycle.

The advantage of equity JV over mezzanine is that it does not add to the project’s fixed financing costs, preserving the viability of more tightly margined schemes. The disadvantage is that you give away a significant share of the upside. In our experience, equity JV is best suited to developers who are capital-constrained but have strong deal-sourcing ability and project management skills, enabling them to deliver multiple projects simultaneously using third-party equity. We connect developers with equity partners through our deal room, matching projects with investors based on risk appetite, location preference, and return requirements.

Proving your equity is a critical step in the application process, and inadequate proof is a common cause of delays and declines. For cash equity, provide three months of bank statements for the accounts holding the funds, clearly highlighted to show the relevant balances. If the funds are spread across multiple accounts, provide statements for each and a summary showing the total. If any significant deposits have been received in the last three months, be prepared to provide evidence of the source, such as a property sale completion statement, dividend payment confirmation, or gift letter.

For land equity, the lender will commission their own independent valuation rather than relying on your stated value. Provide the Land Registry title documents, evidence of your purchase price and date of acquisition, and any improvements or planning permissions obtained since purchase that may have enhanced the value. If the land has a mortgage or charge against it, the outstanding balance must be deducted from the equity calculation. A site worth £800,000 with a £300,000 outstanding bridging loan provides only £500,000 of equity, not £800,000.

For equity from a joint venture partner, the lender will want to see the signed JV agreement, evidence of the partner’s funds, and confirmation that the partnership structure is compatible with the lender’s security requirements. Some lenders require the equity partner to be named as a party to the facility agreement or to provide a personal guarantee, while others are satisfied with the contractual commitment in the JV agreement. Clarify these requirements with your broker before finalising the partnership documentation, as retrofitting legal structures to satisfy lender requirements after the fact is time-consuming and can jeopardise the deal.