Development Finance Explained: Presales, LVR and Loan-to-Cost

Development finance works very differently from a standard property loan. The lender is funding something that doesn’t exist yet, so they look at the cost of the project, what it will be worth when finished, how much you’re putting in and how the loan will be repaid. Understanding these numbers early makes it much easier to tell whether a site stacks up.

The key numbers lenders use

Loan-to-cost (LTC)

The loan as a percentage of total project costs: land, construction, professional fees, council costs, interest and contingency. As a guide, senior lenders commonly fund up to around 70% to 80% of costs.

LVR on gross realisation value (GRV)

GRV is the expected value of the finished project, usually excluding GST. Lenders also cap the loan as a percentage of GRV, typically somewhere around 60% to 70%. Whichever limit is lower decides your maximum loan.

Equity

The difference between the loan and the total cost is your contribution. It’s often made up of equity in the land, sometimes topped up with cash or mezzanine finance.

Presales

Banks commonly require a level of presales before funding, especially for apartments and larger projects. Non-bank and private lenders are often more flexible and may fund with few or no presales, which can let you start sooner, at a higher cost.

What lenders need to see

• Development approval (DA) and plans
• A feasibility showing costs, GRV and profit margin
• A fixed-price building contract with a suitable builder
• A quantity surveyor’s cost report
• Valuation on an “as if complete” basis
• Your experience, or that of your team, with similar projects

How the loan is drawn

Construction funds are released in progress draws as stages are completed, with each claim checked by a quantity surveyor. Interest is usually capitalised during the build, and the loan is repaid from sales or refinanced to a residual stock loan if some units remain unsold.

How a broker helps

Development lending is where lender appetite varies most: presales, LTC, builder requirements and pricing all differ. We work with banks, non-banks, private funds and mezzanine lenders to structure the full capital stack for your project. Read more about construction and development finance and finance for property investors.

Frequently asked questions

How much equity do I need for a development?

It depends on the lender and project, but as a guide senior lenders typically fund up to around 70% to 80% of total project costs. The rest comes from your equity, often the land, or from mezzanine finance.

Do I need presales for development finance?

Banks usually require presales, especially on larger projects. Many non-bank and private lenders will fund with fewer or no presales, at a higher cost.

How is interest paid on a construction loan?

Interest is usually capitalised, meaning it’s added to the loan and paid when the project is sold or refinanced, so you don’t need to fund repayments during the build.

This article is general information only and doesn’t take into account your objectives, financial situation or needs. Speak to us or your accountant before making a decision.