Smart ways to approach commercial development finance

Commercial development finance covers the period between purchasing land or an existing building and completing a construction or refurbishment project that adds value to the asset.

Unlike standard commercial property loans that fund the purchase of an income-producing asset, development finance is structured around progressive drawdown. The lender releases funds in stages as construction milestones are reached, which reduces their risk and aligns your repayments with the cash flow of the project. Most lenders cap the loan amount at 65% to 75% of the projected end value, depending on your experience, the location, and whether you have presales or a tenant commitment in place.

What lenders assess before approving development finance

Lenders look at the feasibility of the project, not just your capacity to service the debt. They will require a quantity surveyor's report, an independent valuation of the completed asset, evidence of planning approval, and a fixed-price building contract. If you are developing commercial property on the Lower North Shore, for instance, a lender will also assess demand for the asset type in that precinct, the quality of the builder, and your equity contribution.

Consider a business owner who acquires a commercial site in Neutral Bay with the intention of building a small office and retail building. The land costs fall within the current median for commercial land in the area. The lender assesses the project based on a valuation of the finished building at completion. With a 70% loan to value ratio, the business owner needs to contribute the remaining 30% as equity, plus cover all costs until the first drawdown is approved. The builder is engaged on a fixed-price contract, and the quantity surveyor provides a stage-by-stage cost breakdown that the lender uses to schedule drawdowns.

How progressive drawdown works in practice

Funds are released at predefined stages, typically after the slab is poured, framing is complete, lockup is reached, and practical completion is certified. Each drawdown requires a site inspection by the lender or their representative, and the builder invoices for work completed. You do not pay interest on the full loan amount from day one. Interest is calculated only on the amount drawn down, which means your repayments increase as the project progresses.

Most commercial development finance is structured with interest-only repayments during construction, converting to principal and interest once the building is complete and tenanted. Some lenders allow the interest to capitalise during construction, which means it is added to the loan balance rather than paid monthly. This option suits developers who do not have strong cash flow during the build phase, but it increases the total amount owed at completion.

When to combine development finance with commercial bridging finance

If you need to settle on the land before your existing funding is in place, or if you are purchasing a site that requires demolition before construction can begin, commercial bridging finance can cover the gap. Bridging loans are short-term, typically six to 12 months, and carry higher interest rates than standard development finance. Once planning approval is finalised and the development loan is approved, the bridging loan is refinanced into the longer-term facility.

In a scenario where a business owner secures a commercial site in Cremorne but does not yet have development approval, a bridging loan covers the land acquisition while the DA is lodged and assessed. Once approval is granted, the bridging loan is rolled into a development facility with progressive drawdown. Without the bridging loan, the business owner would either lose the site or need to fund the purchase entirely from cash reserves.

Fixed interest rate versus variable interest rate on development loans

Most development finance is offered on a variable interest rate because the loan term is relatively short and the amount drawn changes throughout the project. Fixed rates are uncommon for development loans, but some lenders will fix the rate once construction is complete and the loan converts to an investment or commercial property loan. Variable rates give you flexibility to repay the loan early without break costs, which is useful if you sell the asset or refinance once tenants are in place.

If you plan to hold the asset long-term and want certainty over your repayments after completion, you can negotiate a fixed rate for the post-construction period. This approach works for business owners who are developing an office building or warehouse for their own use and want stable repayments over the following three to five years.

Loan structure and collateral requirements

Development finance is always a secured commercial loan. The lender takes a first mortgage over the land and the building as it is constructed. If you are contributing equity from other commercial or residential property, the lender may also require a second mortgage over those assets to reduce their exposure. The more security you can offer, the higher the loan to value ratio you can access and the lower the interest rate.

If the project is large or complex, some lenders offer mezzanine financing as a secondary layer of debt. Mezzanine finance sits between your equity and the senior debt, carries a higher interest rate, and is used to top up funding when the senior lender will not exceed a certain loan to value ratio. This structure is more common in multi-stage developments or projects with a longer timeline to completion.

When pre-settlement finance or a revolving line of credit is useful

Pre-settlement finance can cover costs between contract exchange and settlement if you need to pay the builder's deposit or start demolition before your main loan settles. A revolving line of credit, on the other hand, gives you access to funds as needed during construction, with the ability to redraw as you repay. This structure is useful for developers managing multiple projects or those who want flexibility to cover cost overruns without applying for additional top-up funding.

For business owners expanding or purchasing equipment alongside a development project, combining asset finance or equipment finance with your development loan can spread the funding across different facilities and avoid overloading a single security asset.

What happens if the project runs over budget or time

Most lenders include a contingency buffer in the loan approval, typically 5% to 10% of the total project cost. If costs exceed that buffer, you will need to contribute additional equity or apply for a loan variation. Variations are not automatic, and the lender will reassess the feasibility of the project before approving additional funds. Delays also extend the interest-only period, which increases the total cost of the loan.

If the project stalls or the builder becomes insolvent, the lender may appoint a receiver to complete the works or sell the asset to recover their funds. This outcome is rare but underlines why lenders are particular about builder selection, contract terms, and your financial capacity to absorb unexpected costs.

Call one of our team or book an appointment at a time that works for you to discuss how development finance can be structured for your project, whether you are acquiring land, refurbishing an existing building, or managing a multi-stage commercial development.

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