In property development, understanding financial metrics is essential for success.
Loan to Gross Development Value (LTGDV) is a calculation that helps developers, investors, and lenders assess project viability and risk.
Whether you’re planning your first development or you’re an experienced property professional, getting to grips with LTGDV will enhance your decision-making and improve your project’s chances of success.
This article breaks down LTGDV, explores its significance in the UK property market, and provides practical insights to help you use this metric effectively. From calculation methods to real-world applications, we’ll cover everything you need to know about LTGDV and its potential for your property development endeavours.
Understanding LTGDV: Definition and Importance
Loan to Gross Development Value is a financial ratio comparing the amount of a development loan to the projected value of a completed property project.
Expressed as a percentage, it serves as a key indicator of a development’s financial health and risk level.
For instance, if a developer borrows £6 million for a project with an expected final value of £10 million, the LTGDV would be 60%.
This figure quickly shows lenders and investors how much of the project’s anticipated value is being financed through debt.
LTGDV differs from other common property finance metrics like Loan to Value (LTV) and Loan to Cost (LTC).
While LTV compares the loan amount to the current property value and LTC focuses on total project costs, LTGDV looks ahead to the completed project’s value.
This forward-looking aspect makes LTGDV particularly useful for development projects.
For lenders, LTGDV acts as a risk assessment tool. A lower ratio suggests less risk, as it indicates a smaller portion of the project’s value is funded by debt.
Developers and investors use LTGDV to gauge project viability and potential returns. A well-balanced LTGDV can indicate a project with healthy profit margins and manageable debt levels.
Calculating LTGDV
The LTGDV formula is straightforward:
LTGDV = (Loan Amount / Gross Development Value) x 100
Let’s examine the components:
Gross Development Value
Gross Development Value (GDV) represents the estimated market value of the completed development. It’s a projection based on factors like location, property type, market conditions, and comparable sales. Accurate GDV estimation is vital, as it forms the foundation of the LTGDV calculation.
Loan Amount
For development projects, the loan amount typically includes costs for land acquisition, construction, professional fees, and sometimes a contingency buffer.
Lenders determine this figure based on their assessment of the project’s viability and the developer’s track record.
To illustrate, consider a residential development in Manchester:
A developer plans to build a block of flats with an estimated GDV of £5 million. They secure a loan of £3.25 million to cover land purchase, construction costs, and fees.
LTGDV = (£3.25 million / £5 million) x 100 = 65%
This 65% LTGDV suggests a relatively balanced risk profile for the project.
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Typical LTGDV Ratios in Development Finance
Maximum LTGDV ratios typically range from 60% to 75%.
However, these figures can vary based on several factors:
Project type plays a significant role
Residential developments often secure higher LTGDV ratios compared to commercial projects, as lenders generally view the residential market as more stable.
For example, a new-build housing estate might attract an LTGDV of up to 70%, while a speculative office development might be limited to 60%.
Location also influences Loan to Gross Development Value
Projects in London and the South East, known for their robust property markets, might achieve higher LTGDV ratios. A development in central London could potentially secure 75%, while a similar project in a smaller city might be offered 65%.
The scale of the project can affect LTGDV too
Larger developments might attract more favourable terms due to economies of scale and potentially lower risk profiles. A major mixed-use scheme in Birmingham, for example, could achieve a higher LTGDV compared to a small infill development in the same city.
LTGDV’s Role in Lender Decision-Making
Lenders use LTGDV as a key tool in their risk assessment process.
A lower percentage is preferred as it indicates a larger cushion between the loan amount and the projected property value. This buffer provides protection against market fluctuations or project setbacks.
For instance, a lender might set a maximum LTGDV of 65% for most development projects. This means that even if the completed development’s value falls by 35%, the lender could still potentially recoup their loan through a sale.
LTGDV significantly impacts loan terms.
Projects with lower ratios can benefit from more favourable interest rates and less stringent conditions. For example, a project with a 60% LTGDV might secure a lower interest rate than a similar project at 70%.
Loan to Gross Development Value is only one factor that lenders consider.
They also assess the developer’s experience, the project’s feasibility, and broader market conditions. A developer with a strong track record of successful projects would probably secure a higher percentage ratio than a first-time developer, even for similar projects.
As with all loan types, each lender has it’s own view on risk, which then affects the maximum loan percentage. The better rates can often be secured from lenders who only go to 60%.
But if your project needs 70%, there will be lenders to look at, but the rates would normally be a bit higher, as they are taking on additional risk.
LTGDV from a Developer’s Perspective
For developers, LTGDV is a balancing act between maximising borrowing and maintaining project viability. A higher LTGDV allows for more debt financing, potentially increasing returns on equity.
However, it also increases risk and borrowing costs.
Consider two scenarios for a £10 million GDV project:
Scenario A: 60% LTGDV
- Loan: £6 million
- Developer’s equity: £4 million
Scenario B: 70% LTGDV
- Loan: £7 million
- Developer’s equity: £3 million
While Scenario B requires less upfront capital from the developer, it also means higher interest costs and potentially stricter lender oversight.
To improve LTGDV, developers can focus on enhancing the end value through thoughtful design and strong pre-sales. They might also explore ways to reduce costs without compromising quality, effectively lowering the required loan amount.
A common pitfall is overestimating Gross Development Value or underestimating costs, leading to an unrealistic LTGDV. This can result in funding shortfalls or difficulty refinancing. Careful market research and conservative projections are essential to avoid these issues.
Practical Tips for Developers and Investors
When discussing borrowing limits with lenders, preparation is key.
Develop a comprehensive business plan that clearly outlines your project’s viability. Include detailed cost projections, market analysis, and a robust exit strategy. The stronger your case, the better your chances of securing favourable terms.
If you’re facing unfavourable LTGDV terms, consider alternative financing options.
Mezzanine finance can help bridge funding gaps, allowing you to achieve your desired leverage without pushing your senior debt LTGDV too high. Joint ventures with equity partners are another option, potentially improving your overall funding structure.
Working with experienced brokers or advisers can significantly enhance your financing outcomes, and give you access to many more lenders.
They can help you understand the nuances of development finance, connect you with suitable lenders, and provide valuable insights into current market trends. When choosing an adviser, look for those with a strong track record in your specific type of development and region.
Is it possible to get 100% LTGDV development funding?
While achieving 100% LTGDV development funding is uncommon in the UK property market, it’s not entirely out of reach.
Typically, lenders offer between 60-75% LTGDV, with some stretching to 80-85% for exceptionally strong projects. However, reaching 100% LTGDV requires a combination of funding sources.
A potential structure for 100% LTGDV might involve senior debt covering 65-75%, mezzanine finance providing an additional 10-20%, and equity or junior debt making up the rest. This approach comes with higher overall capital costs and increased complexity in deal structure, often leading to greater scrutiny from lenders.
Alternatives to achieve full funding include joint ventures with equity partners, crowdfunding for a portion of the capital, or using bridging loans to cover short-term gaps.
Need some help?
If you need a bridging loan or development finance then a specialist broker is a good place to start. You will get expert help and advice along with a wide range of lenders to choose from.
To get matched with a specialist broker, please call us on 0330 030 5050.
