Why do development finance ratios matter?
When a lender assesses a development finance application, they use a set of ratios to determine how much they are willing to lend. These ratios measure the loan amount against different benchmarks — the completed value, the total cost, and the current value of the site. Understanding these ratios is essential for any borrower or broker working in UK property development.
Loan-to-Gross Development Value (LTGDV)
LTGDV is the total loan facility expressed as a percentage of the Gross Development Value (GDV) — the estimated market value of the completed project. This is the ratio lenders care about most, because it measures their exposure against the end product.
Formula: LTGDV = Total Facility ÷ GDV × 100
Example: A scheme with a GDV of £5 million and a total facility of £3.25 million has an LTGDV of 65%.
Most UK development finance lenders cap LTGDV at 60–70%. Senior lenders typically sit at 55–65%, while stretched senior or mezzanine lenders may go to 70–75%.
Loan-to-Cost (LTC)
LTC measures the total loan facility against total project costs — including land acquisition, build costs, professional fees, finance costs, and contingency. It tells the lender how much of the total project cost they are funding versus how much the borrower is contributing as equity.
Formula: LTC = Total Facility ÷ Total Project Cost × 100
Example: Total project costs of £4 million with a facility of £3.2 million gives an LTC of 80%.
Typical LTC ranges in the UK market are 75–90%. A higher LTC means the borrower needs less equity, but the lender takes on more risk — so rates and fees are usually higher.
Loan-to-Value (LTV)
In development finance, LTV usually refers to the day-one advance as a percentage of the current market value of the site (before any development work). This is sometimes called "day-one LTV" to distinguish it from LTGDV.
Formula: Day-one LTV = Day-one Advance ÷ Current Site Value × 100
Day-one LTV of up to 65–70% is typical for the land element. Some lenders will go higher if the borrower has strong experience and the scheme has robust planning.
How these ratios interact
A lender will assess all three ratios and lend to the most conservative result. For example, even if the LTC allows a £3.5 million facility, the LTGDV cap might restrict it to £3.25 million. The binding constraint determines the actual loan size.
This is why development appraisals need accurate GDV estimates and realistic cost budgets — both directly affect the ratios and therefore the amount a lender will provide.
Profit on cost
Alongside the three core ratios, lenders also assess the developer's profit margin. Profit on cost is calculated as: (GDV − Total Costs) ÷ Total Costs × 100. Most lenders require a minimum profit on cost of 15–20% for the deal to be viable. This margin provides a buffer — if GDV falls or costs rise, there is still enough profit to absorb the shock without the lender being exposed.
Frequently asked questions
Which ratio is most important to lenders?
LTGDV is generally the primary ratio because it measures the lender's total exposure against the completed asset value. However, lenders assess all ratios together — a deal with a low LTGDV but very high LTC (meaning thin borrower equity) may still raise concerns.
Can I improve my ratios?
Yes. Common approaches include: injecting more equity (reduces LTC), obtaining a higher GDV valuation through design improvements or unit mix changes (improves LTGDV), or reducing build costs through value engineering (improves both LTC and profit margin).