How development finance is actually assessed

Development finance is assessed on the project more than the borrower. Before a lender looks closely at you, it wants to know whether the numbers stack up, who's building it and what it'll be worth when it's finished.

Two limits, not one

Lenders cap a development loan two ways: as a share of the total development cost, and as a share of the completed value, often quoted as the gross realisation value, usually excluding GST. The loan is limited by whichever is lower, so a project can pass one test and fail the other.

The feasibility

Your feasibility study sets out the land cost, construction, professional fees, finance costs, contingency and the expected sales. Lenders test it closely, particularly the sales assumptions and the margin. A thin margin leaves no room for cost overruns, and it's one of the most common reasons a project struggles to get funded.

Presales

Some lenders require a level of presales before they'll fund construction, as evidence the finished product will sell. Others will lend with few or none, usually at a higher cost and lower leverage, because they're carrying more of the sales risk.

The builder and the contract

Lenders look at who's building the project, their financial position and their track record, and usually want a fixed-price building contract. A strong builder can be the difference between an approval and a decline.

How the money flows

• The site is usually funded first, sometimes as a separate facility
• A quantity surveyor checks the budget before construction starts
• Construction is drawn down in stages, each released against the quantity surveyor's sign-off
• Interest is usually capitalised, added to the loan rather than paid monthly during the build
• The loan is repaid from settlements, or refinanced with a residual stock facility if some dwellings are still unsold

Where projects come unstuck

• A site bought before the construction funding was tested
• A feasibility with too little margin for cost increases
• Presales that fall short of what the lender requires
• Drawdowns delayed by incomplete paperwork between stages
• A construction loan reaching its term with dwellings still unsold

Where we come in

We test the feasibility honestly before it goes to market, plan the site and construction funding together, and coordinate the quantity surveyor, valuer and lender through every drawdown. More on development finance.

General information only. This article does not take into account your objectives, financial situation or needs, and it is not personal financial, legal or taxation advice. Lending criteria, fees and conditions apply, and all applications are subject to lender assessment and approval.