Private Development & Construction Finance in Australia

What is development finance?

Development finance is a short-term loan for a property project built to sell or to hold: a duplex, townhouses, an apartment block, a land subdivision or a commercial building. It funds the land and the build in stages and is repaid at the end, usually from sales or a refinance.

How it differs from a home loan

A home loan is long-term, assessed on your income and repaid month by month. A development loan runs for the life of the project, is assessed on what the finished project will be worth and cost, often adds the interest to the balance, and falls due in full at completion.

Regulation differs too. Credit for personal, domestic or household purposes, or to buy, renovate or improve residential property as an investment, is consumer credit regulated under the National Credit Code. Credit wholly or mainly for business purposes, as development finance for a project built to sell usually is, generally falls outside it.

How it differs from a construction loan

A construction loan typically funds one home you will live in or keep, and rolls into an ordinary loan when the build finishes. Development finance funds a project valued on what it will sell or refinance for, so the feasibility carries the weight. A small duplex sits between the two, and lenders treat it either way.

Property developer loans: who they suit, and who they don't

Property development loans are written at every scale, from a first duplex to a multi-unit project with a professional team. The structure is much the same; what changes is how much a lender will lend and how closely it watches the build. They suit:

• Owners of a well-located block who want to knock down and build a duplex or townhouses
• Builders developing on their own account rather than building for clients
• Developers running townhouse, apartment or mixed-use projects through a project company
• Landowners subdividing a large lot into residential lots
• Commercial development finance for industrial units, warehouses, shops or offices, often assessed on pre-leases rather than presales

When it is the wrong choice

If you are building one home to live in, a construction loan is usually simpler and cheaper. If the feasibility leaves only a thin margin, borrowing to build can turn a small risk into a large one; selling the site with its approval, or taking on a joint venture partner, may be wiser.

What stages of a development project can be funded?

Each stage carries different risk. Some lenders fund the whole project; others fund one stage only, so a project can change lenders along the way. Say in your request which stage you are at.

Site acquisition, with or without a development approval

A site loan funds the land purchase. A site with a development approval (DA) or planning permit is a clearer proposition, because the lender can see what will be built. Land bought before approval is more speculative: expect a lower loan against its value and closer questions about the planning path.

Pre-construction and approvals

Architects, engineers, town planners, council contributions and holding costs all come before the first slab. Some private lenders fund this stage, often by extending a site loan, so you can carry the project through approval and builder tender.

Construction, drawn in progress payments

Construction finance is released in instalments as the build reaches each stage and the work is inspected. You pay interest only on what has been drawn, and the construction loan usually refinances any site loan when building starts.

Residual stock loans

Dwellings unsold at completion are residual stock. A residual stock loan repays the construction lender and gives you time to sell at a sensible price instead of discounting to meet a deadline. Some also release equity for your next project.

Land banking

Land banking means holding land for longer, often while waiting on rezoning or infrastructure. With no near-term sale to repay the loan, fewer lenders offer it, they lend less against the land and they usually expect the interest to be paid as you go.

I want to buy land: site and subdivision finance

If you want to buy land to develop, a lender first asks what happens to it next. A block you will build on, a site you will take through approval and a parcel you will subdivide are funded differently.

Land subdivision finance funds the purchase and the civil works – earthworks, roads, drainage and services – needed to create new titles. It is usually repaid as lots settle after the plan of subdivision is registered, so lot presales and staged releases matter. For any land purchase, expect questions about:

• The purchase price, stamp duty and the current value of the land
• The zoning, any approval in place and its conditions
• The cost of civil works and authority connections, backed by quotes
• How long you will hold the land and how the interest will be met

GRV development finance: how a development loan is sized

A development loan is sized against two measures. The loan has to fit within the lender's limit on each, so whichever is tighter decides how much you can borrow.

Loan-to-value against the gross realisation value

The gross realisation value (GRV) is what the finished project is expected to sell for: every dwelling or lot at completion, as assessed by an independent valuer the lender instructs. A loan-to-value ratio against GRV compares the loan with that end value, and shows how far prices could fall before the loan is at risk.

Loan-to-cost against the total development cost

The total development cost is everything it takes to deliver the project: land, stamp duty, construction, professional fees, council charges, finance costs including capitalised interest, contingency and selling costs. A loan-to-cost ratio compares the loan with that total, showing how much of the project you fund yourself.

A project with a healthy margin is usually limited by loan-to-cost; one with a thin margin by loan-to-value. Private and non-bank lenders can lend further on both measures than a bank would, and price that extra risk into their rates and fees.

Developer equity, land equity and presales

Your equity is the part of the total development cost the loan does not cover. Lenders want it spent first, usually on the land and early costs, so their money only ever funds work you have already backed.

How land equity counts

If you own the site, its value can count as equity. Many lenders use the current value set by their valuer rather than what you paid, so land held for years, or improved by an approval, can carry much of your contribution. Some count only the purchase price. Any mortgage on the land is usually repaid by the development loan, and only the value above it counts.

Presales and when lenders want them

A presale is an unconditional contract signed before completion, with a deposit paid, by a buyer at arm's length from you. Presales prove demand and lock in part of the exit. Banks often want a meaningful level of presales before funding construction, particularly on larger projects.

Private and non-bank lenders may fund with few or no presales, usually lending less and charging more. On a small project such as a duplex, presales are often not required at all.

Construction development finance: progress draws and the quantity surveyor

Construction development finance is not paid out as a lump sum. The builder claims progress payments at each stage – site works, slab, frame, lock-up, fixing, practical completion – and the lender releases a drawdown once the work has been checked, usually paying the builder directly.

The checking is done by an independent quantity surveyor (QS), a construction cost specialist the lender appoints and you usually pay for:

1. Before construction, the QS reviews the budget, building contract, plans and program, and confirms the loan plus your equity will finish the job.
2. During construction, the QS inspects before each drawdown, certifies the work done and reports the cost to complete.

Lenders keep the undrawn loan at least equal to the cost to complete. If costs rise and that test fails, you put in more money before the next draw is released.

Senior debt, mezzanine finance and preferred equity

Larger projects are often funded in layers, known as the capital stack. Each layer ranks differently if the project goes wrong, and its cost reflects where it sits.

• Senior debt: the first-ranking loan, secured by a first mortgage over the site. It is repaid first, so it is priced below the layers behind it.
• Mezzanine or second-ranking finance: a loan behind the senior lender, usually with a second mortgage and a deed of priority between the lenders. It reduces the equity you need, at a noticeably higher cost.
• Preferred equity: money invested in the project company rather than lent to it. It ranks behind all debt but ahead of your equity, and expects a set return before profits are shared.
• Developer's equity: your cash and land equity, which ranks last and takes the first loss.

Some private lenders offer one stretched senior loan instead of separate layers. Every extra layer eats into the margin, so it suits projects with room to absorb it.

What lenders assess on a loan for a development project

Whether you are borrowing for a duplex or an apartment building, the assessment turns on the same questions:

• Feasibility: a full model of costs, revenue, timing and finance costs, and whether it holds up if prices fall or costs rise
• Margin: the expected profit, which is the buffer that protects everyone if the project runs into trouble
• Builder: track record, financial strength, licence and insurances, and a fixed-price building contract rather than cost-plus
• Team: the experience of the developer, project manager and consultants on comparable projects
• Approvals: the development approval, its conditions and how close the project is to a building permit
• Exit: comparable sales, presales or pre-leases, and a realistic plan for stock that does not sell
• Borrower: usually a project company set up for the development, with its directors usually asked to sign as guarantors

A fixed-price contract matters because it moves most cost increases to the builder. Under cost-plus, that risk stays with you, and lenders will want more equity or contingency.

Development finance for first-time developers

A first project is harder to fund, not impossible. Lenders worry less about your lack of history when the people around you have plenty, and when a mistake will not sink the project.

• Start at a scale you can carry: a duplex, a few townhouses or a small subdivision
• Use an experienced, financially sound builder and a project manager who has delivered similar work
• Put in more equity than an experienced developer would, and keep a genuine contingency
• Build the feasibility on today's prices and costs, not hoped-for growth
• Consider a joint venture with a landowner or an experienced developer

Private lenders are often more open to first-time developers than banks are, and compensate with lower leverage and higher pricing. A well-run first project builds the track record for the next.

What does a development finance broker do?

A development finance broker knows which lenders fund which kinds of project, at which stage and where. Their value is in matching your project to lenders whose appetite fits, and presenting it the way credit teams need to see it.

• Reviews your feasibility and points out what a lender will question
• Prepares the submission: plans, approvals, costings, builder details and the exit
• Approaches suitable lenders and compares their full terms, not just the rate
• Arranges mezzanine finance or preferred equity where the senior loan falls short
• Coordinates the valuation, QS reports and legal documents through to settlement

Brokers are paid by the lender, by you, or both. How a broker is paid, and how much, should be disclosed to you in writing before you commit. Ask whether any fee is payable if the loan does not go ahead.

Development finance costs, by type

Development finance costs more than a home loan, and fees are a real part of that cost. Compare offers on the total cost over the expected life of the project, not the headline rate. Each lender sets its own pricing; expect these types of cost:

• Interest: often capitalised – set aside within the facility and added to the balance – so there are no monthly repayments, but it compounds and counts towards the loan size
• Establishment fee: charged when the loan is set up, usually paid from the loan at settlement
• Line fee: charged on the full facility limit, drawn or not, under some loan structures
• Quantity surveyor and valuation fees: the initial reports, each progress inspection and the lender's valuations
• Legal fees: your lawyer and, usually, the lender's lawyer too
• Broker fees, if you use one, and any extension or discharge fees

Read the default and extension terms closely. If the project runs past the loan term, extension costs or default interest can take a large part of your margin.

Development risks and how to manage them

Most development losses come from a handful of risks. None can be removed, but each can be planned for before you borrow.

Cost overruns and builder failure

Materials, labour and site conditions can push costs past the budget, and a builder that fails mid-project leaves you paying a replacement. Use a fixed-price contract, investigate the site before you commit, check the builder's finances and insurances, and keep a contingency you do not plan to spend.

Delays

Approval conditions, weather, trade shortages and authority connections can hold up completion while capitalised interest keeps running. Set the loan term with a buffer beyond the build program, and know what an extension costs before you sign.

Valuation on completion

If the market softens, the finished dwellings may be valued below the GRV in your feasibility, shrinking your margin and any refinance. Base your numbers on recent comparable sales, test them against lower prices and keep enough margin to absorb a fall.

Sales risk

Stock can take longer to sell than planned. Presales, sensible pricing, a product that suits local buyers and a residual stock loan as a fallback all reduce the pressure to sell into a weak market.

The exit: sales, residual stock or refinance

The exit is how the development loan is repaid, and lenders weigh it as heavily as the project itself. Plan it from the start, with a second option if the first stalls.

• Sales: settlements of presold and newly sold dwellings or lots repay the loan, usually in full before you see any profit
• Residual stock loan: a new loan against unsold completed stock, giving you time to sell without a deadline
• Investment loan: if you keep some or all of the dwellings, a long-term loan assessed on the rent and your income
• A mix: sell enough to clear the development loan and refinance the rest to hold

If you plan to hold, check before you start that an investment lender will take the finished property and that your income supports the repayments.

Private funding for property development, and the alternatives

Private funding for property development comes from private lenders, private credit funds and individual investors. It suits projects a bank declines or cannot fund by your settlement date: few presales, a first-time developer, a complex site or higher leverage. You pay for that flexibility in rates and fees. Weigh the alternatives:

• A bank development loan, which usually costs less if you have the presales, equity and experience it requires
• A joint venture with the landowner, who contributes the site for a share of the profit
• Equity partners or private investors who share the profit instead of charging interest
• Selling the site with its development approval, taking the planning uplift without the construction risk

How to get development finance through ADS.finance

ADS.finance is a loan marketplace, not a lender. It does not lend money, does not give financial or credit advice and does not recommend any lender or loan. ADS checks every loan request before it goes live to 200+ verified Australian Finance Providers: private lenders, non-bank lenders, mortgage brokers and commercial finance brokers.

Requests are for property, commercial and business finance from $100,000, and there is no credit check to post. One lender or broker can take your request on and contact you; you are never obliged to go ahead.

What to put in your development finance request

• The stage: site purchase, approvals, construction, residual stock or land banking
• The project: the number and type of dwellings or lots, and where it is
• The land: what you paid, what it is worth now and any debt on it
• The total development cost and the expected GRV
• Your equity, including land equity, and any presales or pre-leases
• The approval status, the builder and the type of building contract
• The exit, and how soon you need the money

You do not need plans or a full feasibility to post; a provider that takes your request on will ask for them. Each lender and broker sets its own rates, fees and lending criteria and is responsible for its own licences and disclosures.

If you are an investor or lender who funds development projects, you can join the network as a Finance Provider.