Development Finance: Why LTV, LTC, Contingency and Exit Must Be Read Together

Property development finance is commonly summarised using loan-to-value and loan-to-cost. Both are useful, but neither should be assessed in isolation. A lender also needs to understand the cost plan, build programme, sponsor equity, interest and fees, contingency, sales or refinance assumptions and the developer's ability to manage delays. Two schemes with the same headline LTV can present very different risks.

Loan-to-value

LTV compares debt with a stated value, often the current value or gross development value. The calculation should identify which debt is included and the valuation basis, date and assumptions. Gross development value is a forecast: it can change with sales rates, incentives, planning, specification, interest rates and market conditions.

Loan-to-cost

LTC compares debt with total project cost. The cost figure should include acquisition, construction, professional fees, planning obligations, finance costs, taxes where applicable, sales and marketing, contingency and other project-specific items. Omitting rolled-up interest or an essential cost can make the leverage appear lower while leaving the scheme underfunded.

Sponsor equity and cost-to-complete

Evidence of equity spent to date should reconcile to bank statements, completion statements, invoices and the cost report. At each drawdown, the cost-to-complete calculation should show that undrawn debt, remaining equity and available contingency are sufficient to finish the scheme.

Contingency must reflect the project

A percentage contingency is not automatically adequate. Its purpose is to absorb unforeseen cost and programme risk, and the appropriate level depends on design stage, procurement route, fixed-price coverage, site conditions, inflation and contractor strength. Contingency should not be used to conceal known omitted works or an unrealistic initial budget.

The exit connects every assumption

A sales exit requires evidence on demand, pricing, absorption, incentives and the period needed to release units. A refinance exit requires a plausible completed value, income profile, stabilisation period and debt-service position at the assumed future terms. The model should test lower values, cost overruns and a delayed exit together, because these risks often compound.

Prepare a development finance proposal. Send Charter HCP a high-level summary of the business, proposed transaction, funding requirement and intended repayment or exit, and a member of the team will confirm whether the opportunity falls within Charter HCP's scope.