Exit Fees on Development Loans: How They Erode Your Profit Margin

An exit fee, sometimes called a redemption fee or discharge fee, is a charge levied by the lender when you repay your development finance facility in full. It is typically expressed as a percentage of the total loan amount, ranging from 0.5% to 1.5%, or occasionally as a flat fee. On a £2,500,000 facility, a 1% exit fee amounts to £25,000, which is a significant sum that comes directly off your bottom line at the point when you are realising your profit.

Exit fees apply at the point of redemption, which in development finance usually coincides with the sale of completed units or a refinance onto a long-term facility such as a commercial mortgage. The timing is important because the exit fee is typically calculated on the original gross facility amount, not the outstanding balance at the point of redemption. If you have repaid part of the loan through unit sales, you may still owe the exit fee on the full original facility, which can feel punitive.

Not all lenders charge exit fees, and this is one of the most important distinctions when comparing term sheets. In our experience, approximately 40% of development finance lenders include an exit fee, while the remaining 60% do not. However, lenders who do not charge an exit fee often compensate with a higher arrangement fee or interest rate, so you need to evaluate the total cost of finance rather than focusing on any single line item. The interplay between these different charges is precisely why working with a specialist broker who can model all costs simultaneously is so valuable for developers across the UK.

The impact of an exit fee on your profit margin is often larger than developers anticipate, because it falls at the end of the project when other costs have already been incurred. Consider a scheme with a GDV of £3,200,000, total development costs of £2,700,000 (including land, build, and finance costs), and a projected profit of £500,000 representing a 15.6% margin on GDV. A 1% exit fee on the £2,000,000 facility adds £20,000 to your costs, reducing your profit to £480,000 and your margin to 15%. That 0.6% reduction may seem small in percentage terms, but it represents a 4% reduction in your absolute profit.

The erosion is even more significant on tighter schemes. A smaller project with a GDV of £1,200,000 and a projected profit of £150,000 would see a 1% exit fee on an £800,000 facility consume £8,000, reducing profit to £142,000 and cutting the margin by more than 5% in relative terms. For developers working on schemes where the profit margin is already close to the lender's minimum threshold of 20% on cost, an unexpected exit fee can push the scheme below the viability line.

We always advise developers to model exit fees explicitly in their development appraisals. Too often we see appraisals that budget for interest and arrangement fees but overlook the exit fee entirely. When we arrange finance through our deal room, we provide a complete cost breakdown that includes all exit costs, so there are no surprises at the point of redemption.

Exit fees come in several forms, and understanding the structure is essential for accurate budgeting. The most common is the percentage-based exit fee, calculated as a fixed percentage of the gross facility. This is straightforward but can be expensive on larger facilities. A 1% fee on a £5,000,000 facility is £50,000 regardless of how quickly you repay the loan or how much you have already paid down.

Some lenders use a declining exit fee structure where the percentage reduces over time. For example, the exit fee might be 1.5% if the loan is repaid in the first six months, 1% if repaid between six and twelve months, and 0.5% if repaid after twelve months. This structure incentivises you to hold the loan for the full term, which benefits the lender because they earn more interest. However, it can penalise developers who sell units quickly and want to redeem early.

A third variation is the minimum interest guarantee, which functions as an indirect exit fee. Under this structure, the lender specifies a minimum amount of interest that must be paid regardless of when the loan is repaid. If the minimum interest is set at six months and you repay the loan in four months, you still owe two additional months of interest. On a £2,000,000 facility at 9% per annum, two months of interest amounts to £30,000. This is effectively an exit penalty dressed up as a contractual interest provision, and it is one of the hidden charges that developers must look out for.

The most effective strategy is to choose a lender who does not charge exit fees. As we noted, roughly 60% of development finance lenders operate without them, and an experienced broker can quickly identify these options. When we prepare term sheet comparisons for our clients, we highlight whether each lender charges an exit fee and model the impact on total finance costs, making it easy to see the true cost of each option.

If you are working with a lender who does charge an exit fee, negotiate the terms at the outset. Some lenders will waive the exit fee if you commit to a higher arrangement fee or a longer minimum interest period. Others will reduce the exit fee for repeat borrowers as part of a loyalty arrangement. We have successfully negotiated the removal of exit fees for clients who bring multiple deals to the same lender, creating a relationship-based pricing structure that benefits both parties.

Another approach is to negotiate a partial release mechanism that allows you to make prepayments without triggering the exit fee until the final redemption. This is particularly useful for phased residential schemes where you are selling units individually. If you can pay down the loan with each unit sale without incurring the exit fee on each partial repayment, you reduce the outstanding balance and therefore the absolute cost of the exit fee when it is finally applied to the remaining sum. This structure is more common with development finance lenders who specialise in residential sales programmes.

When transitioning from a development loan to a development exit finance facility, exit fees become particularly relevant. Development exit finance is a short-term product designed to bridge the gap between practical completion and final unit sales, allowing you to repay the original development loan and benefit from lower interest rates during the sales period.

The exit fee on your original development loan will typically crystallise when you refinance onto the exit facility. This means you need to factor the exit fee into the economics of the refinance. If the exit fee is £20,000 but the interest saving from moving to a cheaper exit facility is £35,000 over the expected sales period, the refinance makes sense. However, if the interest saving is only £15,000, the exit fee makes the refinance uneconomical and you would be better off remaining on the original facility.

We model these scenarios for every client who is considering development exit finance. The calculation needs to account for the exit fee on the original facility, the arrangement fee on the new exit facility, legal costs for the refinance (typically £3,000 to £8,000 for both sides), and the interest differential between the two products. Only when the net saving exceeds all these costs is the refinance worthwhile. Our team can run this analysis for your specific project; submit your details through our deal room to get started.

Before signing any development finance facility agreement, check the following exit-related provisions. First, confirm the exact percentage and calculation basis for the exit fee. Is it calculated on the gross facility, the peak drawn balance, or the outstanding balance at redemption? Each produces a different figure, and the difference can be substantial.

Second, review the minimum interest provisions. Even if there is no explicit exit fee, a minimum interest guarantee achieves the same effect. Check whether the minimum interest period is reasonable relative to your expected build programme. If you expect to complete in ten months, a six-month minimum interest period is acceptable, but a twelve-month minimum effectively guarantees two months of additional interest that you would not otherwise pay.

Third, check the partial release provisions. If you are selling units individually, you need the ability to release individual titles from the lender's charge without triggering the full exit fee. The terms of partial releases, including any fees charged per release, should be clearly documented. In our experience, partial release fees range from £250 to £750 per unit, plus legal costs. These costs accumulate on larger schemes and should be included in your appraisal alongside the headline true cost of development finance. If any terms are unclear, seek clarification before you sign. The facility agreement is a legally binding document, and assumptions made at the term sheet stage may not be reflected in the final documentation. We review every facility agreement for our clients to ensure exit provisions match the terms originally agreed.