Development loans and off-plan deposits: the financing that conditions the sale
Nextica Law & Tax acts as the outsourced finance director of a developer or a property portfolio: structuring the development loan and its drawdown against works certificates, guaranteeing the amounts paid on account by buyers on the terms required by the first additional provision of the Building Regulation Act, fitting in Law 5/2019 on real estate credit agreements where sales to individuals involve subrogation, a cash plan per development with its lowest point marked, and an asset dashboard with yield, occupancy and turnover.
Without guaranteeing the deposits you cannot sell off-plan, and without selling off-plan the loan is not drawn down.
What's included
1. A financial plan for the development breaking down land, construction, licence, financing and marketing costs, with the margin on sales calculated by phase.
2. Financing structure
developer loan drawn against construction milestones, required equity contribution and drawdown schedule.
3. Compliance with the regime for buyers' advance payments
a separate account and a guarantee from the first payment.
4. A cash table per project and consolidated, with the point of maximum cash need identified before starting.
5. Calculating return on total cost and return on committed equity, which are two different numbers and are frequently confused.
6. Preparing what the lender will ask for before it asks, with the historical variance between budget and execution.
7. Monthly tracking of construction certificates against budget, to see the variance while it can still be corrected.
THE BUYER'S MONEY IS NOT THE DEVELOPER'S MONEY
It comes in before what has been sold exists, and the law treats it as what it is: an advance that must be returned if the building never arrives.
Using buyers' advance payments as working capital for the works
the law requires them to be received through a separate special account and guaranteed from the first payment, and that guarantee has a cost that belongs in the financial plan from the start.
first additional provision of Law 38/1999 on Building StandardsSelling to private buyers without complying with the pre-contractual transparency duties for credit agreements: where the deal relies on buyer financing, the law imposes content, deadlines and prior information whose breach can affect the validity of what was agreed.
Law 5/2019 on real estate credit agreementsLooking only at return on total cost
it tells you whether the development is good, not whether the company survives. What decides whether you reach the end is the point of maximum cash need, and it arrives mid-construction, when the loan is drawn against milestones and sales are not there yet.
Frequently asked questions
What does the law require to take deposits before handover?
Guaranteeing them and keeping them separate. The first additional provision of the Building Regulation Act requires a developer taking amounts on account of the price during construction to guarantee their return, plus interest, through insurance or a bank guarantee, and to receive them through a special account kept separate from any other funds and used exclusively for the construction. This is not a recommendation: breach has consequences both for the developer and for the institution that opens the account without requiring the guarantee, and it is the first thing an informed buyer checks.
Why does a development's cash need spike just before handover?
Because the development loan is drawn against certificates of work executed, always behind the spend, while payments to the builder, the site management, licences and utilities run ahead. On top of that comes the final stretch: snagging, handover, legalisations and conveyancing concentrate cost exactly when the bulk of the price has not yet arrived, since it comes on delivery. That is why a development's cash plan is built by month and by milestone, with the lowest point identified and the working capital line sized before it is needed, not when it already is.
Content reviewed by
Elena Bosch Prat
Directora · Consultoría Contable y Financiera
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