Pub development and conversion finance

Who can borrow and what lenders look for

Development lenders fund experienced developers and operators, or first-timers who bring in the right team. They want a planning consent in place or close to it, and on a change of use a clear position on the use class, because a pub generally sits in the Sui Generis category and moving into or out of pub use needs consent rather than permitted development rights. On a pub-to-residential scheme they will check for any Asset of Community Value listing, which can give the local community a window to bid and can weigh in the planning balance, because it affects both the timetable and the certainty of the exit. They want a fixed-price or well-controlled build contract, a credible contractor with a track record on similar works, and a realistic programme with contingency. Where the finished scheme is a pub, they also assess the operator and the demand, because a pub that cannot reach a sensible trade will not service its eventual term debt. They expect the developer to commit meaningful equity, often 35 to 40 percent of cost, so the borrower has capital at risk alongside the lender. On a conversion the works can be harder to price than a new build, because an existing structure can hide problems behind its walls, so lenders want a thorough survey and a realistic contingency. We package the scheme, the team, the planning and use-class position and the demand or sales evidence to give the lender confidence the scheme will be built on budget and exited on plan.

How much you can borrow

Development lenders work to two limits and lend to the lower of them. Loan-to-cost is the share of total project cost they will fund, indicatively up to 60 to 65 percent, with the developer providing the balance as equity. The second limit caps the loan at around 60 to 65 percent of the gross development value the finished scheme will reach, which protects the lender against an over-optimistic appraisal. The achievable loan therefore depends as much on the projected end value as on the build cost, and the end value depends on what the scheme becomes. A pub-to-residential conversion is valued on the completed homes, often a step up from the value of a non-viable pub, while a barn-to-pub conversion is valued on the going concern the finished pub will support, driven by the trade it can build. The interplay between the two limits matters: a scheme with a modest cost but a high end value is constrained by loan-to-cost and leaves the developer needing less equity, while a scheme where the cost is high relative to the finished value is constrained by the GDV limit and demands more equity, even if the build itself is cheap. This is why we run both calculations on every appraisal rather than quote a single percentage. On a strong scheme, mezzanine behind the senior facility can close part of the equity gap where the margin is healthy enough to carry the higher cost of that junior layer. We model both limits, the equity requirement and any top-up from the appraisal so you know your true cash commitment before you commit.

Rates and costs

Development finance is priced for risk and is dearer than a term mortgage, indicatively around 9 to 12 percent a year or 0.85 to 1.25 percent a month, usually with interest rolled up and added to the loan rather than serviced, then repaid on exit. Expect a lender arrangement fee of around 1 to 2 percent, an exit fee on some facilities, a monitoring surveyor's cost for the staged drawdowns, a valuation reporting on cost and GDV, and legal fees for both sides, plus the planning and professional costs of the scheme itself. Because interest rolls up, the length of the build and the lease-up or sale period drives the total finance cost, so a tight, well-run programme saves real money and an overrun is expensive twice over, in extended interest and in the delayed exit. On a change of use the planning timetable can be the biggest variable, especially where an Asset of Community Value listing or a contested application stretches the programme, so we build sensible contingency into both the cost and the time. The monitoring surveyor, who certifies each drawdown against work genuinely completed, protects the lender and keeps the project honest, which is part of why a properly monitored scheme refinances cleanly. We disclose our broker fee in writing, compare facilities on total cost to exit rather than the monthly rate, and never claim an exclusive tie to any lender.

Development finance, bridging or a term mortgage

Development finance is the right product when you are building, extending or changing the use of a building, into a pub or out of one, and the asset does not yet exist in its finished form. Once a new pub is built and open, it moves off the development facility onto a term mortgage once it has a trading record, and on a conversion to homes the exit is usually a sale of the finished units. If you are buying a site or a redundant pub quickly, before the development facility is in place, pub bridging finance can fund the acquisition and roll into the development loan. If the building is already a trading pub and you are simply buying it, acquisition finance, not development finance, is the product you need, and if the works fall short of a genuine build or change of use, a refurbishment facility is the lighter and cheaper route. We plan the full route from site to finished scheme so each stage uses the right money at the right price.