In this guide, we’ll explore how development exit loans work, when they are used, and how they can support your project’s success at a critical stage in its lifecycle.
What Is a Development Exit Loan?
A development exit loan is a short-term form of finance provided to developers or property owners once a project has reached, or is nearing, completion. It replaces the original, often higher-cost development finance and gives the borrower time to market the property, complete unit sales, or arrange long-term refinancing.
Unlike construction loans, which are structured to fund the build phase of a project, exit finance is used post-construction. Its purpose is not to fund building activity but to provide a smoother financial transition from development to disposal or refinance.
These loans are typically secured against the completed property and are repaid through proceeds from asset sales or by refinancing onto a longer-term mortgage facility.
Why Are Development Exit Loans Used?
Many developers reach the end of a project only to find that the timeline for selling units, securing tenants, or refinancing the asset is longer than originally planned. Traditional development loans often come with tight deadlines and high interest rates, meaning that delays, however minor, can lead to increased costs, penalties, or pressure to sell quickly.
Development exit loans address these challenges by:
Reducing the cost of finance post-completion
Extending the timeline for marketing or selling the asset
Protecting cash flow by avoiding forced sales or refinancing under pressure
Providing flexibility for further planning, such as holding the asset for improved market conditions
This type of finance is particularly valuable in slower market environments, where units take longer to sell, or where a better exit valuation can be achieved with more time.
How Development Exit Finance Works
The process of securing and using a development exit loan generally follows a clear sequence:
Completion of the Development: The property must be built or substantially complete. In some cases, a certificate of practical completion is required.
Exit Loan Application: The developer applies for an exit loan, usually with a specialist lender. The application includes details of the completed project, outstanding development finance, and the intended exit strategy (e.g., sale, refinance, or lease-up).
Due Diligence and Valuation: The lender will carry out due diligence, including a valuation of the completed asset and assessment of the loan-to-value (LTV) ratio. They may also review pre-sales, marketing activity, or lease agreements in place.
Loan Approval and Drawdown: Once approved, the exit loan is drawn down and used to repay the original development finance. Any remaining funds may be used for final project expenses or retained by the developer.
Repayment on Exit: The loan is repaid from the proceeds of sale, refinance, or another liquidity event.
Terms typically range from 6 to 18 months, with interest-only repayments or rolled-up interest structures common.
When Is a Development Exit Loan Most Appropriate?
Exit finance is most commonly used in the following scenarios:
Post-Completion Sales Period: Where developers want additional time to market and sell residential or commercial units.
Refinance Delays: If the borrower is waiting to arrange long-term finance or is experiencing delays in bank approvals.
Capital Release: Developers may use exit loans to extract equity from a completed scheme in order to invest in their next project.
Avoiding Default Risk: Where the original development loan is due to expire and the project is not yet sold or refinanced, an exit loan can prevent costly defaults or penalty fees.
Enhancing Asset Value: For properties expected to increase in value over the short term, holding onto the asset a little longer may result in stronger sales or valuation outcomes.
