Selling vs refinancing a completed development: running the numbers

Sell or refinance seen as one cash-flow question

The choice between selling and refinancing a completed development is a question about where the money goes and when. Selling converts the whole scheme into cash in a single window: the units are sold, the development loan is cleared, and the surplus lands as a one-off, usually within a marketing period of twelve to eighteen months. Refinancing does the opposite: it keeps the units, repays the development loan out of new long-term debt, and hands the developer a smaller cash release now in exchange for rental income and continued ownership.

Framed that way, the decision becomes three numbers rather than a matter of strategy in the abstract. The first is the cash each route frees after every real cost has come out. The second is the annual net income a held and let scheme would produce once its new mortgage is serviced. The third is the position after three years, once a sold scheme's cash has been redeployed and a held scheme has collected rent and any growth. Set those three side by side and the answer for a given scheme is usually clear.

The sell route and its true costs

Selling is the route most developers model first, because it realises the profit built into the scheme in one clean move: the units are marketed, sales are agreed, and completions repay the development loan and release the balance. What catches developers out is the gap between the gross development value on the appraisal and the cash that actually reaches the bank. Several costs sit in that gap, and none of them are optional.

Agency fees are the first, usually a percentage of each sale price plus VAT, and on a multi-unit scheme they add up quickly. Conveyancing is a per-unit cost. Then come the buyer incentives a real sales programme needs to hit its timescale: paid stamp duty, upgraded specifications, part-exchange or straightforward price adjustments when the market is soft. Finally there is the cost of carry, because the development loan or the exit bridge that replaces it keeps accruing interest across the whole sales period, so a slower market is not just a delay but a direct cost that eats into the surplus.

The refinance route, rental cover and what surveyors do

Refinancing keeps the units and replaces the development loan with long-term investment debt. For a developer sitting on a block of finished flats, that typically means a buy-to-let mortgage on each one, or, where several units are involved, a single portfolio buy-to-let facility covering the whole scheme. The rental income services the debt, the development facility is redeemed in one move, and any loan above the debt is released as cash. Where a scheme is built to rent from the outset, this is simply the planned exit.

The size of the refinance is set differently from a sale. A buy-to-let lender sizes the loan against the investment value of the let asset and then caps it with a rental cover test, the interest cover ratio, or ICR. The ICR is the multiple by which the rent must exceed the mortgage interest, indicatively 125 percent for a limited company and higher for individual higher-rate taxpayers, tested at a stressed rate above the pay rate. On many schemes it is this cover test, not the loan-to-value ceiling, that sets the maximum loan, because the rent runs out before the value does.

Brand-new units also meet a surveyor's judgement on rental value and on the basis of valuation. A block refinanced as an investment is often assessed on a bulk or portfolio basis, which can sit modestly below the sum of the individual open-market sale prices, because the buyer of the whole block is an investor rather than eight separate owner-occupiers. New-build rents are checked against genuinely comparable local lettings rather than an asking figure. The practical effect is that the investment value driving the refinance can be a little below the GDV that would drive a sale.

A worked comparison on the same eight-unit scheme

The clearest way to see the trade-off is to run one scheme both ways. Take an eight-unit residential block with a gross development value of 2.8 million pounds, 350,000 pounds a unit, a development loan of 1.5 million pounds to repay, and an achievable rent of 1,400 pounds a month per flat. The table below sets the sell route against the refinance-and-hold route on the same numbers. Every figure is illustrative, rounded, and not an offer of finance; a real case would be modelled on its own costs, rents and valuations.

The pattern is the one every developer recognises once it is on paper. Selling frees far more cash immediately, roughly 1.1 million pounds here, which suits a developer who needs capital for the next scheme or wants a clean end to the exposure. Refinancing frees only about 105,000 pounds today, but adds around 23,600 pounds of net rent a year and keeps every unit, so its retained capital and future growth belong to the developer rather than to eight buyers. Over three years the sold cash has to earn its keep elsewhere, while the held scheme compounds rent and value against a static debt.

Tax touchpoints to raise with your accountant

Tax often moves the answer, and it is the part of this decision where a developer should take proper advice rather than a rule of thumb. We do not give tax advice and nothing here is tax advice. What follows is simply the list of touchpoints worth putting in front of an accountant early, because the treatment can differ sharply between selling and holding, and because intention at the outset can shape it.

• Trading versus investment intention: a scheme built to sell is typically trading stock, while a decision to hold and let can move units towards investment treatment, which changes how profits and gains are taxed.
• Capital gains versus income treatment: a sale of trading stock tends to be taxed as income or trading profit, whereas a genuinely held investment asset may fall under capital gains treatment on a later disposal.
• Stamp duty land tax on transfers: moving units into a holding company or between connected parties can be a chargeable transfer for SDLT, so restructuring before a refinance carries a cost to count.
• VAT position: the treatment of new residential build, any commercial element and professional fees is not uniform, and an assumption carried from the build phase can be wrong at exit.
• Timing and year end: unsold stock and the point at which a hold decision is formalised can affect which tax year a profit or gain falls into.

None of these should be guessed. They belong in a numbers-first comparison because a tax bill is a real cash cost, and a route that looks better on the pre-tax figures above can lose that lead once the tax on each is modelled. An accountant who sees the plan before completion, rather than after, can often structure the exit so the chosen route is not undercut by an avoidable charge.

The hybrid: sell some units, refinance the rest

The sell-or-refinance choice is rarely all or nothing. A common and often sensible answer on a multi-unit scheme is to do both: sell enough units to clear the development loan and take some profit, then refinance the remaining units onto a buy-to-let or portfolio facility and hold them for income. This splits the difference between the two columns above, freeing a useful lump of cash while retaining a stake in the scheme's future value.

The hybrid also eases the constraints that bind each pure route. Selling a portion reduces the loan the retained units carry, which can lift them clear of the interest cover ceiling that would otherwise cap the refinance. Holding a portion means the developer is not forced to discount the final, hardest-to-sell units into a soft market to hit a loan maturity. The right split is a modelling exercise on the specific scheme: how many units to sell to clear the debt and fund the next project, and how many to keep for the income the numbers support.

Using an exit bridge to buy time to decide

Not every developer has to choose at the moment the development loan matures, and that is where an exit bridge earns its place. A development exit bridge is a short-term facility taken out at or close to practical completion to clear the maturing development loan; it is measured against gross development value, indicatively as high as 70 to 75 percent, and because the construction risk has already gone it undercuts the development finance it takes over. It gives a sales window of typically twelve to eighteen months without a decision being forced by a hard maturity date.

That breathing space is valuable precisely because sell or refinance is a numbers question, and the numbers get clearer with a little time. Under an exit bridge a developer can test real sale prices on the first units, let a few flats to establish genuine achievable rents, and watch the local market before committing capital either way. If sales move well the bridge clears through completions; if the case for holding firms up, the bridge is instead cleared by a refinance onto buy-to-let or term debt. We source and put in place both that bridge and the take-out sitting behind it, matching each to whichever funder has the appetite for the finished scheme. As an arranger and introducer rather than a lender, we note that every figure on this page is for illustration only and is not an offer of finance.