Development Feasibility Studies: What a Development Finance Lender Reads First

In short: A development finance lender reads the feasibility study to answer three questions: is the end value supported by evidence, are the costs complete and independently checked, and how far can things go wrong before its loan is at risk? It looks first at gross realisation, total development cost and profit, then at contingency and sensitivity. A feaso that only works on its most hopeful assumptions tells the lender the project has no margin for error.

Key takeaways

Lenders size the loan from the feasibility study, so every number in it needs evidence: comparable sales for revenue, a builder's price or quantity surveyor for costs.
Profit is read two ways: profit on cost and margin on realisation. In the example, 25.4% on cost equals 20.3% of net realisation.
Many senior lenders look for profit on cost of roughly 15% to 20% or more, varying by lender and project (indicative).
In the worked example, a 10% fall in sale prices cuts profit by about 47%, and prices can fall about 21% before profit reaches zero.
Missing lines (GST, selling costs, holding costs, realistic finance costs) make a lender doubt every other number in the feaso.
Run the sensitivity yourself before the lender does, and show it.

What is a development feasibility study, and why does the lender start there?

A feasibility study, or feaso, is the business case for a project: what the finished product will sell for, everything it will cost to get there, how long it will take, and the profit left at the end. For a lender it is also the loan sizing tool. The facility limit, the equity you must put in, the interest allowance and the pre-sale or exit requirements all come out of it.

Any lender wants a plan before it lends. business.gov.au's business loan guidance notes that lenders usually want to see a business plan and cash flow information; in property development, the feaso and its cash flow are that plan. If you are new to the structure of these loans, start with construction and development finance, which covers how facilities are drawn and secured.

What the lender is really reading for is margin of safety. Its loan is repaid from sales or a refinance at the end. Your profit is the cushion that absorbs lower prices, higher costs and delays before the lender's money is touched. A feaso that shows a thin cushion, or one built on assumptions nobody has checked, is a feaso that shows risk.

What goes into a feasibility study? A worked example

For illustration, six townhouses on a $1,500,000 site, sold at $1,100,000 each including GST. Every figure below is an example, not a quote or a lender's requirement.

Line	Amount	Note
Gross realisation (6 x $1,100,000, including GST)	$6,600,000	Supported by comparable sales and the lender's valuation
Less GST under the margin scheme	-$463,636	($6,600,000 - $1,500,000) / 11, assuming the scheme is available
Net realisation	$6,136,364
Land	$1,500,000	Contract price
Acquisition costs	$85,000	Transfer duty and legal; duty depends on the state
Construction (6 x $400,000, excluding GST)	$2,400,000	Builder's fixed price or quantity surveyor's estimate
Professional fees	$192,000	8% of construction: design, engineering, certification, project management
Council contributions and authority fees	$120,000	From the consent conditions and utility quotes
Contingency	$120,000	5% of construction
Finance costs	$310,000	Interest, establishment and monitoring fees (see below)
Selling costs	$165,000	2.5% of gross realisation: agent and marketing
Total development cost	$4,892,000
Profit	$1,244,364	Net realisation less total cost
Profit on cost	25.4%	$1,244,364 / $4,892,000
Margin on net realisation	20.3%	$1,244,364 / $6,136,364

The finance line is built, not guessed: a senior facility of about $3.3 million drawn over 18 months, averaging half drawn, at an illustrative 9% gives interest of $222,750 ($3,300,000 x 50% x 9% x 1.5 years). An illustrative 1.5% establishment fee adds $49,500, and valuation, quantity surveyor monitoring and legal costs add $37,750, for $310,000 in total.

Transfer duty is a real cost that varies by state and price; check it on your revenue office's page, such as Revenue NSW's transfer duty page. GST is set by the GST Act, including the margin scheme in Division 75; whether the scheme is available depends on how you bought the land, so confirm it with your accountant before the feaso relies on it.

Which numbers does the lender check first?

Gross realisation. The lender's valuer prepares an "as if complete" value, usually lot by lot, from comparable sales. If your sale prices sit above the valuer's, the valuer's figure wins, and profit and loan size fall with it.
Construction cost. A fixed-price contract with a builder the lender accepts, or a quantity surveyor's cost report, carries weight. A spreadsheet rate per square metre does not.
Profit and its two measures. The lender compares your profit on cost and margin with its own hurdle.
Equity. Total development cost less the facility is the cash (or land equity) you must contribute, usually before the lender's first dollar.
Time and finance costs. A program that looks too short makes the interest allowance look too small.
Exit. Pre-sales, a sales plan, or a credible refinance into an investment facility for any stock you keep.

Lenders also look at who prepared the feaso and whether the same person stands to earn fees from the project. An independent development manager's or quantity surveyor's review adds credibility.

How do profit on cost and margin on realisation differ?

They are the same profit divided by different numbers. Profit on cost divides by total development cost; margin divides by realisation. Because realisation is larger than cost, the margin is always the smaller percentage, and you can convert one to the other: margin = profit on cost / (1 + profit on cost). In the example, 0.254 / 1.254 = 20.3%.

Profit on cost	Equivalent margin on realisation
10%	9.1%
15%	13.0%
20%	16.7%
25%	20.0%

Many senior lenders look for profit on cost of roughly 15% to 20% or more on residential projects, with higher hurdles for first-time developers, unusual product or weaker markets (indicative; it varies by lender and project). Watch which realisation figure a margin uses: some feasos divide by gross realisation including GST, which makes the margin look smaller still. In the example, profit is 18.9% of the $6,600,000 gross figure. State which basis you are using.

How much contingency does a lender expect?

Contingency covers the cost of things that will go wrong but cannot yet be named: ground conditions, design changes, authority requirements, trade price movements. It is not a profit buffer, and lenders treat it as part of the cost they fund.

A common working range is 5% of construction cost for a straightforward new build with a fixed-price contract, rising towards 10% or more for sites with demolition, poor soil, heritage elements or a less complete design (indicative). A feaso with no contingency, or one that counts the builder's own margin as contingency, reads to a lender as a project that will need more money halfway through.

If you want an outside check on whether construction costs are still moving, the ABS Producer Price Indexes publish building construction output prices each quarter.

What sensitivity analysis should the feasibility study include?

Sensitivity shows how profit responds when one assumption moves. Lenders do it to every feaso they see, so do it first and put the results in front of them.

Test (same example)	Profit	Profit on cost	Margin on net realisation
Base case	$1,244,364	25.4%	20.3%
Sale prices down 10%	$660,864	13.6%	11.9%
Construction costs up 10%	$973,164	18.8%	15.9%
Prices down 10% and costs up 10%	$389,664	7.6%	7.0%
Six months' delay (extra interest of $110,250)	$1,134,114	22.7%	18.5%

The price test moves GST and agent fees as well as revenue, which is why profit falls by $583,500 rather than the full $660,000 of lost sales. The delay assumes six more months of interest at 9% on an average drawn balance of $2.45 million. Two figures matter most to a lender. First, a 10% price fall cuts profit by about 47%: this is a leveraged outcome. Second, prices could fall to about $865,400 per townhouse, roughly 21% below the base, before profit reaches zero.

Present the break-even alongside the loan: if the senior debt is $3.3 million and net realisation at break-even is still well above it, the lender can see how much room there is before its own money is exposed.

What makes a lender distrust a feasibility study?

Sale prices with no evidence. Agent appraisals without comparable sales, or prices taken from a larger, better-finished product in a different street.
Land at "value" instead of cost. Counting an expected uplift as profit or as equity before the lender's valuer has confirmed it.
Missing lines. No GST, no selling costs, no land tax or council rates during the build, no contributions.
Finance as a round number. Interest that ignores fees, interest on capitalised interest, or the time to sell after completion.
Zero or token contingency.
A heroic program. Planning approval, construction and sales all on the most hopeful timeline.
Developer fees inside costs. Your own management fee is part of your return, and lenders often strip it out.
A sales rate nobody has tested. Selling every unit in the month of completion.

Any one of these can be explained. Several together suggest the numbers were built to reach an answer.

How do banks, non-banks and private lenders read the same feaso?

Question	Banks	Non-bank lenders	Private lenders
Profit hurdle	Usually stricter	Moderate	Flexible if the security and exit are strong
Leverage on cost	Lower	Higher	Can be higher still, often with mezzanine above
Pre-sales	Often required	Sometimes reduced or waived	Often not required
Experience	Track record expected	Weighed with the project team	Weighed with the security
Price	Usually a smaller margin over base rates	Higher	Higher again, with larger fees

These are general patterns (indicative); individual lenders vary widely. A thin-margin project can sometimes be funded by a lender that charges more for the risk, but higher finance costs come straight out of the profit the feaso shows, so re-run it at that lender's pricing. The ABS Lending Indicators release reports business lending for construction as its own purpose category each quarter, if you want to see the market's direction.

What should you do before you send the feaso to a lender?

Build it in the development feasibility calculator and compare it with your own spreadsheet; differences usually reveal a missing line.
Attach evidence: comparable sales, the builder's price or a quantity surveyor's report, consent conditions, duty and contribution calculations.
Show profit on cost and margin, stating the basis for each.
Add the sensitivity table and the break-even sale price.
Prepare a month-by-month cash flow for the draws; cash flow forecasts lenders accept shows the format lenders expect.
Explain the exit, including what happens to unsold stock; residual stock loans for developers covers that refinance.

When the numbers hold up, post one development finance request on ADS and 200+ verified lenders and brokers can ask about it.

Frequently asked questions

What profit margin do development finance lenders want?

There is no single figure. Many senior lenders look for profit on cost of roughly 15% to 20% or more on residential projects, with higher hurdles for first-time developers or weaker markets (indicative). The lender also checks how much the profit survives a fall in prices or a rise in costs, not just the base figure.

Is profit on cost the same as profit margin?

No. Profit on cost divides profit by total development cost; margin divides it by realisation, which is larger, so the margin is the smaller number. A 20% profit on cost equals a margin of about 16.7%. Always say which measure, and which realisation figure, you are quoting.

Who should prepare a development feasibility study?

You can prepare it yourself, but lenders give more weight to inputs from independent professionals: a valuer or agent for comparable sales, a quantity surveyor or a builder's fixed price for costs, and an accountant for GST and tax. An experienced development manager can review the whole model.

Does a lender use my feaso or its own valuation?

Both. The lender reads your feaso, then orders its own valuation, which usually includes an "as if complete" value and often a review of your costs. Where the two differ, the lender sizes the loan on its valuer's numbers, so overstated prices reduce the loan rather than increase it.

Should finance costs be included in total development cost?

Yes. Interest, establishment fees, line fees, valuation and monitoring costs are real project costs, and lenders expect them in the total. Leaving them out overstates profit. Many facilities capitalise interest, so the interest allowance also forms part of the loan limit.

Sources

Business loan guidance — business.gov.au
Transfer duty — Revenue NSW
A New Tax System (Goods and Services Tax) Act 1999, including Division 75 (margin scheme) — Federal Register of Legislation
Producer Price Indexes, Australia — Australian Bureau of Statistics
Lending Indicators (business construction lending) — Australian Bureau of Statistics

Information current as at 24 October 2026.

General advice warning: This article contains general information only. It does not take into account your objectives, financial situation or needs, and it is not personal credit or financial advice. Consider whether it is appropriate for you and seek advice from a licensed credit representative before acting.

Any interest rate shown is an example only and is not an offer of credit. Where a rate is quoted, the applicable comparison rate is available from the relevant lender and should be considered alongside it.