Development Finance: Understanding LTC, LTGDV and Borrower Equity

Development finance operates on fundamentally different metrics to standard property lending. While a commercial mortgage is assessed primarily on loan-to-value and rental income, development finance is structured around loan-to-cost (LTC), loan-to-gross-development-value (LTGDV) and the borrower's equity contribution. Understanding these metrics and how they interact is essential for any developer seeking funding.

Loan-to-cost measures the total facility as a proportion of the total project cost, including land acquisition, construction costs, professional fees and contingency. Most development lenders will fund up to 70-80% of total costs, though this varies by lender, scheme type and borrower track record. The remaining 20-30% must come from the borrower's own equity — typically a combination of cash and land equity.

Loan-to-GDV measures the total facility against the projected value of the completed scheme. This metric acts as an overall ceiling on the lending, regardless of the LTC position. Most lenders cap LTGDV at 60-70%. This means that even if the LTC ratio is within parameters, the facility will be constrained if the LTGDV limit is breached. On schemes with tight margins, the LTGDV constraint often becomes the binding factor.

The equity requirement is where many development proposals encounter difficulty. Lenders need to see genuine equity at risk — typically cash investment or unencumbered land value. Some lenders will accept mezzanine finance to bridge the equity gap, though this adds cost and complexity to the capital structure. Understanding the equity waterfall and how different lenders treat various forms of equity contribution is critical to structuring a viable funding proposal.

Developers who engage finance advisors early in the appraisal process can stress-test their assumptions against actual lender criteria before committing to a site purchase. This approach reduces the risk of acquiring a site that cannot be funded on acceptable terms.