Guide
What development exit finance is, and when it helps
Updated
The product exists because of a mismatch in how risk is priced. A development loan is priced for the risk that a building does not get built. Once it is built, that risk has gone, but the loan has not, and the developer keeps paying for a risk that no longer exists.
Why the old facility is expensive
Development lending prices construction risk: cost overruns, programme slippage, contractor failure, a scheme that stalls half-finished. That is genuine risk and it is priced accordingly.
At practical completion almost all of it is behind you. What remains is sales risk, which is a different and generally lower risk, and there are lenders who price that specifically. Continuing on development terms after completion means paying a construction premium on a finished building.
What the refinance actually buys
Three things, usually. A lower cost of borrowing while the units sell. Released equity, where the completed value supports a larger facility than the original loan. And time, which is the one that matters most.
A development facility with an expiry three months away puts a developer in a weak position: buyers and their solicitors can smell a deadline, and a scheme sold under time pressure sells for less than one sold properly. Exit finance replaces a hard deadline with a longer one.
When it does not help
When the scheme is not actually saleable at the value it was appraised at. Refinancing a development that will not sell moves the problem twelve months down the road and adds two sets of fees to it. If the issue is price rather than time, the answer is price.
It also does not help where the remaining term is very short and the fees swamp the interest saving. On a facility with three months to run, an arrangement fee and an exit fee can cost more than the margin they save. Do the arithmetic on the whole cost, not on the rate.
Timing it
Most lenders in this market will look at a scheme at or close to practical completion, and some will go earlier where the remaining works are cosmetic and warranties are in place. Earlier than that and you are asking for development finance again, under another name.
Start the conversation before the existing facility is inside its final quarter. Refinancing is a valuation and a legal process, and doing it against an expiry that has already passed removes whatever negotiating position you had.