The 124K Evidence Framework

1. What changes on 1 January 2027

Under the current UK framework, development finance exposures secured by real estate are risk-weighted at 100% (sometimes 50% for completed residential). There is no separate "ADC" category. There is no 150% default.

Basel 3.1, implemented in the UK through PRA instrument PRA2026/1 (accompanying PS1/26), creates a new exposure class: Acquisition, Development and Construction (ADC). The rules are set out in Articles 124 through 124K of the revised Credit Risk: Standardised Approach (CRR) Part.

The impact is straightforward: every loan secured by property that has been acquired or is held for development and construction purposes, where works are not yet complete, moves from 100% to 150% risk weight by default.

2. The 124K exception: from 150% to 100%

Article 124K provides exactly one route from 150% to 100%. It applies only to ADC exposures financing residential land acquisition, development, or construction. Two conditions must both be satisfied:

Note what this does not cover. Commercial ADC (ground-up offices, retail, industrial) has no exception. It remains at 150% regardless of underwriting quality. The 100% route is residential only.

3. What is an "ADC exposure"?

An exposure is ADC if the property has been acquired or is held for development and construction purposes and the works are not yet complete (Article 124A(1)(a)).

An exposure is not ADC (it is "regulatory real estate") if any of the following apply:

• The property was not acquired for, and is not held for, development and construction
• The property was acquired for development and construction, but the works are complete
• It is a self-build exposure (an explicit carve-out under Article 124A(1)(a)(iii))

Practical classification examples

The classification test is not about the nature of the works (heavy vs light). It is about the purpose of acquisition or holding. A full renovation of a property that has been someone's home for ten years is not ADC. A cosmetic refresh of a property bought last month to sell at a profit is ADC.

4. Condition (a): "Prudent underwriting standards"

The rulebook barely defines this. Article 124B states:

Article 124K(2)(a) adds that prudent underwriting standards must include consideration of "the valuation of any real estate used as security for the exposure."

That is the full extent of the definition. Two components:

1. Assess the borrower's ability to repay
2. Prudently value the security

The PRA has deliberately left "prudent" as a principles-based term. In practice, for ADC lending, any credit committee would expect this to cover:

At origination

• Borrower appraisal: track record, experience, net worth, personal guarantees
• Independent RICS Red Book valuation: site value and gross development value (GDV)
• Development appraisal: cost plan, build programme, contingency
• Legal due diligence: title, planning consent, charges
• Appropriate LTV and LTC limits
• Security package: first charge, debenture, PGs

During the loan

This is where the rulebook creates an important ambiguity. "Prudent underwriting standards" is not defined as a point-in-time origination exercise. The PRA could reasonably argue that if conditions deteriorate and the lender takes no action, the original underwriting was not "prudent" in retrospect.

Consider: if a borrower had substantial equity at risk at origination, but costs have overrun by 40% and they have not topped up, is the equity still substantial? If pre-sales existed at drawdown but two buyers have withdrawn, is it still a "significant portion"?

A lender cannot answer these questions without ongoing data.

5. Condition (b)(i): Pre-sale and pre-lease contracts

The first route to satisfying condition (b) requires three elements, all of which must hold simultaneously:

1. Legally binding pre-sale or pre-lease contracts
2. Purchasers or tenants have made a substantial cash deposit subject to forfeiture
3. These contracts amount to a significant portion of total contracts

The rulebook does not define "substantial" or "significant." This is intentional: the PRA expects lenders to form their own view and be able to defend it.

Evidence required

Pre-lease: how it differs from pre-sale

The rulebook treats pre-sales and pre-leases equally for the purpose of condition (b)(i), but the commercial reality is quite different. Lenders should understand these differences when assessing evidence quality.

The critical point for 124K evidence: a pre-lease proves income security (the building will be let), not repayment from sale proceeds. The lender's exit on a pre-leased scheme is almost always a refinance. This means the lender should also assess the borrower's ability to refinance, and the likely investment value of a let asset, not just the pre-lease coverage percentage.

6. Condition (b)(ii): Borrower equity at risk

The alternative route to condition (b) requires the borrower to have "substantial equity at risk." Again, "substantial" is not defined.

How borrower equity erodes

At origination, a borrower may contribute 25-30% of total project costs as equity. This is typically a combination of:

• Cash contribution (land value above the senior debt, or cash into a development account)
• Land equity (where the site was purchased below its appraised value or is owned outright)
• Mezzanine or subordinated debt (depending on the lender's definition of "equity")

As the project progresses, equity at risk can be diluted by:

• Cost overruns beyond contingency: Most development appraisals include a contingency allowance (typically 5-10% of build costs). Variations and minor overruns consume contingency first, not the developer's equity. However, if costs exceed the total appraised budget (contingency exhausted), the developer must either inject additional cash or the project risks stalling. Where total costs rise and the developer does not top up, the economic equity buffer between total cost and GDV narrows, even if the cash they originally contributed has not been withdrawn.
• Variations: JCT contract variations are the leading cause of cost overruns on UK development sites. A variation instruction that adds £80k to a £1.5m build may appear minor in isolation, but variations compound. Tracking variation instructions against the original contract sum in real time provides the earliest possible signal that contingency is being consumed and that a facility top-up or developer equity injection may be needed.
• Cash withdrawals: The most direct form of equity erosion. If the developer withdraws funds from the project account, their actual equity at risk reduces immediately. Open banking integration provides live visibility of this, rather than relying on periodic self-certification.
• GDV decline: If market conditions reduce the expected sale proceeds, the residual equity buffer between total cost and total value narrows, even if the developer's cash contribution has not changed.
• Additional draws: If the borrower draws down contingency or the facility is upsized without a corresponding equity injection, the lender's proportional exposure increases.

Evidence required

7. The evidence pack: what 124K compliance looks like

Bringing the above together, a lender seeking to classify an ADC exposure at 100% under Article 124K should be able to produce the following evidence, both at origination and on an ongoing basis:

8. Reclassification triggers

A lender should define clear triggers for when an exposure should be reclassified from 100% back to 150%. While the PRA does not prescribe specific thresholds, we suggest the following as a starting framework:

9. When ADC status ends

An exposure ceases to be ADC when "development and construction is complete" (Article 124A(1)(a)(ii)). At that point, it reclassifies as a regulatory real estate exposure and moves to the risk weight tables in Articles 124F through 124I, which are significantly lower.

Evidence of completion should include:

• Practical completion certificate from the contractor
• Building control sign-off / completion certificate from the local authority
• Final QS report confirming all works complete and final account agreed
• Updated valuation on a completed basis

The transition from ADC to regulatory real estate is a significant capital event. A £10m exposure moving from 150% to (for example) 35% risk weight releases approximately £920k of capital. Lenders should have a clear process for recognising this reclassification promptly.

10. Portfolio-level reporting

Individual loan-level evidence is necessary but not sufficient. The PRA will expect lenders to report on ADC exposure at the portfolio level. Key questions a CRO or CFO should be able to answer at any time:

• What is our total ADC exposure?
• How much is classified at 100%? How much at 150%?
• What is the net capital impact vs the pre-Basel 3.1 position?
• How many exposures have moved from 100% to 150% (or vice versa) this quarter?
• Which exposures are at risk of reclassification based on current data?
• What is our aggregate pre-sale coverage across the book?
• What is the weighted average borrower equity position?

This is where spreadsheet-based processes typically break down. An individual relationship manager can track one loan in a spreadsheet. Reporting across 50, 80, or 150 live ADC facilities requires a system that aggregates, classifies, and flags in a consistent and auditable way.

11. Audit trail requirements

The PRA expects firms to be able to demonstrate their risk weight calculations are defensible. For ADC exposures classified at 100%, this means being able to show:

• When the classification was made and by whom
• What data supported the classification at that time
• How conditions (a) and (b) were assessed
• Whether the classification has been reassessed since origination
• What changed if a reclassification occurred (and when)

An email from a borrower confirming four pre-sales is evidence. A timestamped record showing that on a specific date, four exchanged contracts were recorded against a defined threshold, triggering an automatic 100% classification, with the source documents attached, is an audit trail.

12. How Mintstone addresses this framework

Mintstone was built specifically to operationalise the evidence requirements described in this paper. The table below maps each 124K condition to the corresponding Mintstone capability.

Disclaimer

This paper is published by Mintstone Ltd for informational purposes only. It does not constitute legal, regulatory, or financial advice. The interpretation of PRA2026/1 and Article 124K presented here reflects Mintstone's reading of the published rulebook instrument. Lenders should obtain independent legal and regulatory advice before making capital classification decisions. Mintstone is not regulated by the FCA or PRA. The 124K Evidence Framework is a suggested approach, not a regulatory requirement or industry standard.