Hidden Arrangement Fees in Development Finance: What Lenders Don't Tell You

An arrangement fee is the upfront charge a lender levies for setting up your development finance facility. On the surface it seems simple: lenders typically quote between 1% and 2% of the total facility. For a £2,000,000 loan that translates to £20,000 to £40,000 before you have even broken ground. However, the headline percentage rarely tells the full story. In our experience arranging hundreds of facilities each year, we have seen significant variations in how lenders calculate, disclose, and collect arrangement fees. Some lenders charge the fee on the gross facility amount, while others calculate it on the net day-one advance. That single distinction can create a difference of several thousand pounds on a typical scheme.

The arrangement fee is distinct from other charges such as broker fees, valuation fees, and legal costs, although borrowers sometimes conflate them. Understanding exactly what is included in your arrangement fee, and what is excluded, is the first step toward controlling your total cost of finance. We always recommend requesting a fully itemised term sheet before signing heads of terms, because lenders who bundle charges into a single line item often have the most expensive facilities once you break down the numbers.

It is also worth noting that arrangement fees in development finance are generally non-refundable once the facility has been documented, even if you choose not to draw down the loan. This makes it critical to be confident in your scheme before committing. A £30,000 arrangement fee that you cannot recover is a significant cost, particularly on smaller schemes where margins are already tight.

One of the most common techniques we encounter is the split arrangement fee. A lender might quote a 1.5% arrangement fee but then add a separate 0.5% commitment fee, a 0.25% administration fee, and a £1,500 documentation fee. Individually these charges seem modest, but collectively they can push the effective arrangement cost to 2.5% or more. We have seen cases where a developer chose what appeared to be the cheapest lender based on the headline arrangement fee, only to discover at the point of signing facility documents that the total upfront cost was £15,000 higher than a competitor who quoted a higher headline rate but had no hidden extras.

Another common approach is for lenders to charge the arrangement fee on the gross facility rather than the amount actually advanced. If your facility is £3,000,000 but you only draw £2,200,000 because you complete ahead of schedule, the arrangement fee is still calculated on the full £3,000,000. That means you are effectively paying for capacity you never used. In contrast, some lenders on our panel calculate the fee on net advances, which can save developers between £5,000 and £12,000 on a typical residential scheme.

Deferred arrangement fees are another area that catches developers off guard. Some lenders allow you to roll the arrangement fee into the facility so that you do not pay it upfront. While this improves your initial cash position, you are now paying interest on the fee itself for the duration of the loan. On a 15-month facility at 8.5% per annum, a £25,000 deferred arrangement fee generates an additional £2,656 in rolled-up interest. Compounding this over longer projects can add meaningfully to your total cost, which is why we always model the true cost of deferred fees versus paying them from equity at the outset.

The arrangement fee is one of the most negotiable elements of a development finance facility, but only if you approach negotiations with the right information. Lenders have internal margins on arrangement fees, and an experienced broker will know where the flexibility lies. In our experience, the strongest negotiating positions come from borrowers who can demonstrate a clear, deliverable scheme with strong fundamentals: good planning status, realistic build costs, proven demand in the local market, and a credible exit strategy.

Repeat borrowers almost always negotiate better arrangement fees. If you are working with a lender for the second or third time, you should expect a reduction of at least 0.25% on the arrangement fee compared to your first facility. Some lenders on our panel offer loyalty pricing that reduces the arrangement fee to as low as 0.75% for borrowers who have successfully completed two or more schemes. This is one reason why building a relationship with a lender through your broker can pay dividends over time, particularly for developers active in regions such as Greater London and the South East where scheme volumes are highest.

We recommend that every developer request a complete fee schedule at the term sheet stage, not just the headline arrangement fee. Ask explicitly about commitment fees, administration fees, document preparation charges, and any minimum fee thresholds. A fully transparent lender will have no problem providing this information. If a lender is reluctant to itemise their charges before you commit, that itself is a red flag. Submit your project details through our deal room and we will provide a side-by-side comparison of total arrangement costs across multiple lenders.

Arrangement fees vary considerably depending on the type of facility. Standard senior development finance typically attracts fees of 1% to 2%. Bridging loans tend to sit at the higher end, often 2%, because the facility sizes are smaller and lenders need to cover their fixed costs. Mezzanine finance is the most expensive layer, with arrangement fees ranging from 2% to 3% reflecting the higher risk position of the mezzanine lender.

For larger facilities above £5,000,000, there is more room to negotiate because the absolute fee amount is substantial even at lower percentages. A 1% fee on a £10,000,000 facility is £100,000, which provides the lender with significant income. We have successfully negotiated fees down to 0.75% on facilities of this size for experienced developers with strong track records. Conversely, smaller facilities below £1,000,000 often attract minimum fee provisions. A lender might have a minimum arrangement fee of £10,000 regardless of the loan size, which on a £500,000 facility equates to an effective rate of 2%.

Refurbishment finance facilities, which are typically smaller and shorter in duration, usually carry arrangement fees of 1.5% to 2%. The key variable is whether the lender classifies your project as light or heavy refurbishment, as heavy refurbishment schemes attract higher fees due to the increased complexity and risk. Understanding how your project is classified can directly affect the arrangement fee you are quoted.

Every pound spent on arrangement fees is a pound deducted from your profit margin. On a scheme with a projected profit of £200,000, a difference of £10,000 in arrangement fees represents a 5% reduction in your return. This is why we always stress the importance of modelling the full finance cost, including arrangement fees, in your development appraisal before you commit to a site acquisition.

We recommend including arrangement fees as a separate line item in your appraisal rather than absorbing them into a general finance cost percentage. This gives you clarity on what you are actually paying and makes it easier to compare offers from different lenders. If you are using a gross development value calculation to assess viability, as explained in our guide on how to calculate GDV, make sure you deduct the full arrangement fee from your cash flow model, including any deferred element that will accrue interest.

For developers working in competitive markets like Surrey, Kent, and Hampshire, where land values are high and margins can be tighter, the arrangement fee becomes even more critical. A difference of 0.5% on a facility secured against a site acquired at £1,500,000 could determine whether your scheme meets the 20% profit-on-GDV threshold that most lenders require. We have seen viable schemes become unviable simply because the developer did not shop around on fees.

There are several warning signs that suggest a lender is using arrangement fees to extract excessive value. The first is a minimum fee provision that is disproportionate to the facility size. If a lender quotes 1.5% with a minimum of £20,000, and your facility is £800,000, you are effectively paying 2.5%. Always check the minimum fee against your actual loan amount.

The second red flag is an arrangement fee that is payable on signing heads of terms rather than on completion of the facility documentation. Reputable lenders do not require arrangement fees until the facility is ready to draw. If you are asked to pay upfront before due diligence is complete, proceed with extreme caution. We have seen borrowers lose thousands of pounds to lenders who collected fees and then declined the facility at a later stage.

A third issue is arrangement fees calculated on the total facility including the contingency element. If your facility includes a £150,000 contingency that you may never draw, paying an arrangement fee on that amount is poor value. Some lenders on our panel will exclude the contingency from the fee calculation, which is a more equitable approach. Always ask how the contingency is treated in the fee calculation, and factor this into your comparison when evaluating term sheets from multiple providers.