Starting Without Pre-Sales
A developer who wants to break ground with nothing sold is not asking for a variation on a standard facility. He is asking the lender to fund the entire construction period without the one piece of evidence that normally proves the building will be wanted at the price the budget assumes. It can be done. It is done regularly, in both of the markets where we work. But it is priced, structured and controlled differently, and the developer who understands why arrives at the table with the difference already built into his own numbers.
The conversation usually goes wrong because the absence of pre-sales is presented as a detail rather than as the central credit question of the transaction. It is the central question. Everything the lender asks for in exchange follows from it, and the honest way to approach the file is to state the decision, give the reasons, and show what has been put in place instead.
What a pre-sale actually proves to a lender
A pre-sale is not a marketing achievement in the lender’s reading of it. It is third party evidence, produced by someone with no interest in flattering the developer, that demand exists for this product, in this location, at approximately this price. A valuation is a professional opinion about what buyers would pay. A signed contract with a deposit behind it is a buyer who has said so with money. Those are not the same category of evidence, and credit committees treat them accordingly.
The pre-sale also does structural work. It converts a portion of the exit from a forecast into a contracted receivable, payable on completion, which the lender can trace and in many structures capture directly. That shortens the distance between the day the money is spent and the day it is repaid, which is the interval a development lender is really pricing. Every unit sold before the first drawdown removes part of that interval from the underwriting, and the removal is permanent.
There is a behavioural layer as well. Buyers who commit early to a scheme are usually buyers who believe it will be delivered, and a run of early sales tells the lender something about the developer’s standing in that market that no reference letter can. Equally, a scheme that has been marketed for a long period without contracts tells the lender something else, and it is not neutral information.
What the lender loses when there are no pre-sales is therefore not one comfort but three: the price validation, the contracted repayment, and the market signal. Nothing entirely replaces them. What follows in the terms of the facility is the lender’s attempt to compensate for their absence with structure, cushion and control, because those are the only instruments it has left.
Why a developer chooses to start without them
There are good reasons, and lenders know them. A developer may believe the finished product will sell better and at a stronger price than the drawings will, particularly for a distinctive scheme or a market where buyers do not commit off plan. The product may not be aimed at individual purchasers at all: a scheme intended for rental, or for sale as a block to a single institutional buyer, does not have retail pre-sales by design. Permit validity or a construction calendar may force a start on a date that leaves no room for a sales period first. In a rising market, a developer may simply prefer not to fix his prices at the earliest and weakest point of the cycle.
Then there is the other reason, which is that the units have been marketed and have not sold. The lender’s first task is to establish which of the two situations it is looking at, because the terms diverge sharply from there. A developer who chose not to sell is asking the lender to share a timing decision. A developer whose units did not sell is asking the lender to fund a scheme the market has already declined once, and that is a different transaction with a different price, if it is available at all.
This distinction cannot be managed by omission. Marketing history is discoverable, agents talk, and portals leave a record. A file that presents an unsold scheme as a deliberate strategy and is then found out has damaged itself twice, once on the sales evidence and once on the candour, and the second is harder to repair. Where a scheme has been on the market without success, the honest file says so, explains what has changed since, and evidences the change: a new price, a revised product, a different agent, a shift in the local market that can be demonstrated.
A rental or institutional exit deserves its own treatment rather than being described as an absence of sales. It is not a scheme without an exit; it is a scheme with a different one, and it is evidenced differently. Letting evidence for comparable stock, an operator or manager identified, a forward purchase agreement or a serious institutional interest, and a set of investment values that a lender can test against the market. Presented that way, the lack of pre-sales stops being a gap in the file and becomes a description of the business plan.
What the lender asks in exchange
The first requirement is more of the developer’s own money, in front of the debt and locked in for longer. The logic is not punitive. The cushion has to do the work that contracted sales would otherwise have done, absorbing the risk that the completed units sell more slowly or for less than the budget assumes. The developer who arrives having already sized his equity for that reality negotiates about structure. The developer who arrives with the equity of a pre-sold scheme negotiates about whether there is a transaction at all.
The second is structure. Facilities without pre-sales are tranched more tightly, with more conditions attached to each release, and the milestones are commercial as well as physical. A lender may fund the early works and make later drawdowns conditional on a sales position being reached by a given stage, on marketing having been launched by a given date, or on independent evidence that values have held. Sales proceeds are commonly swept against the facility as they arrive rather than released to the developer. None of this is unusual; what is unusual is a developer who has not modelled the consequences of a milestone being missed.
The third is recourse and support. Where a pre-sold scheme might be financed largely on the project, a scheme with no sales tends to attract a firmer undertaking from the sponsor: to fund cost overruns above the contingency, to cover interest if the sales period extends, and in some cases to stand behind a shortfall at maturity. The lender will examine the sponsor’s own position rather than only the project’s, because that undertaking is only worth what the person giving it is worth. Term length is calibrated to a sales period that begins later, and the lender will usually want a second exit documented, typically a refinancing of the completed asset onto investment terms if unit sales are slower than planned.
The fourth is price, and it moves for the same reason everything else does. Money that carries more of the risk costs more. How much more depends on the scheme, the market, the sponsor and the institution, and any figure quoted in the abstract would be misleading in a specific transaction. What can be stated with confidence is the direction and the reason, and that a developer running his numbers on the pricing of a pre-sold facility is running them on the wrong assumption.
The honest cost of the decision
The most underestimated cost is not the margin. It is the shortlist. Traditional banks, family offices and specialist credit institutions all fund development, but their appetite for speculative construction is uneven, and starting without pre-sales removes a meaningful part of the market from the conversation. Fewer candidates means less competitive tension, which means terms that are accepted rather than negotiated. The developer who has never tested this assumes he is choosing a structure. He is usually also choosing a much smaller set of counterparties.
The second cost is capital, measured in time rather than in amount. Equity that sits in the ground through construction and then through a sales period that has not yet started is equity that cannot start the next project. A scheme can produce a better result per unit and a worse result per year, and developers who track only the first are surprised by the second. This is a portfolio decision disguised as a project decision, and it deserves to be made at portfolio level.
The third cost is the covenant that bites at the worst moment. If drawdowns are conditional on a sales position and the sales do not arrive, funding stops at the point where the site holds the maximum amount of spent money and the minimum amount of sellable value. That is the single most dangerous position in development, and it is reached not through failure but through a plan that assumed a market. The mitigation is to negotiate the consequence of a missed milestone at the outset, when there is still something to negotiate with, rather than in the month it happens.
Against all of that sits the reason developers do it, and it is a real reason. Unsold units at completion are priced by the market at completion, not by the market two years earlier, and in the right cycle that difference is where the profit of the scheme actually sits. Pricing flexibility retained is worth something. The point is not that starting without pre-sales is wrong. It is that it is a paid position, and the file should demonstrate that the developer knows what he is paying and can survive being wrong about the market between two dates that nobody controls.
Presenting the decision so that it can be financed
The file that gets financed states the decision in the first pages and defends it with evidence rather than conviction. Why this scheme is not being pre-sold, what the alternative route to the exit is, and what independent material supports it: absorption of comparable stock in the same submarket, agent evidence on pricing and pace, letting evidence where the exit is rental, and any contracted interest short of a sale. The developer’s own track record of delivering and selling comparable schemes belongs here too, documented rather than described.
The structure should anticipate what the lender will require instead of resisting it. Equity sized for a scheme carrying its own sales risk, a contingency proportionate to the programme, financing costs budgeted for a period that includes a sales phase after completion, and a documented second exit through refinancing of the finished asset. Offering the tranche conditions before they are imposed changes the tone of the conversation, because it demonstrates that the developer has underwritten his own decision rather than asking the lender to underwrite it alone.
In one Dutch land and construction financing we structured, the exit was prepared on both routes from the outset, through unit sales and through refinancing of the stabilised asset, with disbursements tied to the certified progress of the works so that capital remained available to finish. That is the shape a scheme without contracted sales has to take: two ways out, money released against evidence, and a cushion sized for the possibility that the first way out is slower than the plan.
Starting without pre-sales is a legitimate commercial decision and it is financeable. What is not financeable is the same decision presented as an oversight, unsupported by market evidence, with the equity and the contingency of a de-risked scheme and a single exit. The lenders who fund speculative construction are not looking for certainty; they know the product does not offer it. They are looking for a developer who has priced his own optimism and can pay for it if the market takes its time.
Montclare does not act as a lender. It structures transactions, prepares the file and coordinates financing with authorised institutions.