Commercial Property Development Finance: The Definitive Australian Guide

Commercial property development finance is the umbrella term for any debt facility used to fund the construction, conversion or substantial redevelopment of commercial real estate. In Australia, the typical facility funds three discrete cost lines: the acquisition (or refinancing) of the development site, the hard and soft construction costs, and the interest cost capitalised through the construction period. A well-structured facility covers all three under a single loan with a coordinated drawdown schedule; a poorly structured facility forces the sponsor to fund some component from working capital, which creates avoidable liquidity stress.

Development finance differs from investment lending in three fundamental ways. First, the lender's primary security — a completed asset on stabilised income — does not yet exist; the loan is underwritten on a forecast value (Gross Realisable Value or End Value) rather than a current value. Second, the loan is drawn progressively against construction milestones rather than in a single advance at settlement. Third, the repayment of the loan is almost never from the asset's ongoing income — it is from the realisation event at completion, whether that is sales, refinance to investment debt, or a portfolio recapitalisation.

Australian commercial development is funded through a three-layer capital stack: senior debt at the bottom (first-ranking security, lowest cost, lowest risk to the lender), mezzanine debt in the middle (second-ranking, often unsecured, materially higher cost), and sponsor equity at the top (residual claim, exposed to all downside, capturing all upside). The relative proportions of each layer drive both the project's blended cost of capital and its risk profile.

Senior debt

Senior debt sits on first-ranking mortgage security over the site and project. Bank senior typically funds 55–65% of Total Development Cost (TDC) and 55–65% of Gross Realisable Value (GRV) on residential-style developments, with commercial-only developments often funded slightly tighter at 55–60%. Specialist non-bank senior pushes higher — 70–75% of TDC and 65–70% of GRV are routinely achievable for sponsors with track record. Senior debt pricing is typically the lowest in the stack: bank senior generally indicatively 7–9% all-in in 2026, non-bank senior 9–13%.

Mezzanine debt

Mezzanine debt sits behind senior in the priority waterfall, typically secured by second-ranking mortgage or by guarantees from project special purpose vehicles. It funds the gap between senior debt and the sponsor's equity contribution. Mezzanine is materially more expensive than senior — indicative all-in cost 14–22% per annum capitalised — because the lender takes meaningfully higher loss-given-default risk. A typical mezzanine layer adds 10–15% of TDC of additional debt above senior; sponsors use it to reduce equity cheque size and improve equity IRR on completion.

Sponsor equity

Sponsor equity is the residual at the top of the stack, funded by the developer (and any external equity partners). Equity is the most expensive capital in the stack — equity IRR targets on Australian commercial development typically range 18–30%+ depending on risk profile and cycle — but it is the only capital that retains the project's upside. The composition of the equity layer (developer cash, related-party loans, external equity, preferred equity) materially shapes how the lender views the whole deal.

Development credit assessment is built around five core inputs: site, sponsor, scheme, feasibility and exit. Each one carries veto power — a weakness in any single input typically takes the deal off the table, regardless of how strong the other four are.

Site

The lender will independently re-underwrite the site through three lenses: location and submarket fundamentals, the planning approval (DA status, conditions, residual risk), and any environmental, heritage or contamination overlay. A clean DA with no material conditions, in a submarket with demonstrated absorption, on a site with no environmental flags, is the cleanest possible starting point.

Sponsor

Sponsor assessment focuses on directly comparable track record. A sponsor who has completed three residential developments of similar scale will get materially better terms on a residential proposal than on a first commercial development of equivalent value. Lenders look for completion track record (number of completed projects, cumulative GRV), depth of team (in-house project management vs full external), and balance sheet capacity to absorb cost overruns. First-time developers can secure finance, but typically only at smaller scale (sub-$10m), at lower LVR (typically 55–60% of TDC), and with strong builder covenant carrying the construction risk.

Scheme

Scheme review covers the design, the builder selection, the construction program and the procurement strategy. Builders are graded by their own credit rating (D&B or equivalent), recent completion history and balance sheet. A tier-one or established mid-tier builder on a fixed-price design-and-construct (D&C) contract significantly reduces lender perception of cost-overrun risk; an unknown builder on a cost-plus contract dramatically increases it.

Feasibility

The feasibility model is the lender's central reference document. It must be granular, internally consistent and supportable by independent evidence at every line. Lenders typically commission their own quantity surveyor (QS) to validate hard cost inputs, an independent valuer to validate GRV inputs, and may engage a planning consultant to validate timeline assumptions. Any material divergence between the sponsor's feasibility and the lender's independent inputs becomes a credit conversation — usually resolved by haircuts to LVR or revised contingency.

Exit

The exit is the single most important conversation in any development finance submission. The lender needs to see a credible, evidenced path for the loan to be fully repaid at completion. The three standard exits are: pre-sales (binding contracts that will settle on completion), refinance to investment debt (typically only viable on income-producing commercial that achieves stabilised income within 6–12 months of completion), and residual stock sales (where some component is sold post-completion). Pre-sales are universally the most credit-positive exit; pure refinance exits require strong tenant lease commitments at credit submission.

Development lending uses three related but distinct ratio measures, and confusing them is one of the most common sources of sponsor frustration. Knowing what each one means and which one a lender is leading with materially affects negotiation.

LTC — Loan to Cost

Loan to Cost expresses the loan amount as a percentage of Total Development Cost (TDC). TDC includes the site, all hard and soft construction costs, professional fees, council contributions, marketing costs, finance costs (including capitalised interest) and a contingency reserve. A 70% LTC facility on a $20m TDC project provides $14m of debt; the sponsor funds the remaining $6m as equity. LTC is the most commonly cited headline ratio in non-bank development finance.

LTGRV — Loan to Gross Realisable Value

Loan to Gross Realisable Value (LTGRV, or sometimes LTGV or LTEV — Loan to End Value) expresses the loan as a percentage of forecast project value on completion. Banks typically lead with LTGV in their internal credit assessment because it speaks to recoverability on a completed-asset basis. A 60% LTGV cap on a $25m forecast GRV project gives $15m of debt regardless of whether TDC is $20m or $22m.

When both apply

Most facilities have both LTC and LTGV caps, and the binding constraint is whichever ratio is reached first. On well-margined projects (TDC well below GRV), LTC is usually the binding constraint and LTGV provides headroom; on tighter-margin projects (TDC approaching GRV), LTGV binds first. Understanding which one binds on your specific deal lets you have an informed conversation about which lever to push if you need additional debt capacity.

On residential and mixed-use developments, presales are the dominant credit conversation. Banks typically require qualifying presales equal to 100–120% of senior debt (sometimes called the 'debt cover ratio' on presales) — meaning that the unconditional contracts on hand, at the contract prices, are sufficient to fully repay senior debt on settlement of those contracts. Non-bank senior lenders accept materially lower thresholds, sometimes as low as 50–70% of debt, in exchange for materially higher pricing.

Presale quality is as important as quantity. Lenders apply explicit haircuts to overseas-purchaser contracts (typically 50% credit weight), to contracts with extended settlement terms, and to contracts taken at materially below valuation. A presale book of 30 contracts that washes through the lender's overlays might only count as 18 contracts of qualifying presales.

On pure commercial development (office, industrial, retail), the equivalent is precommitments — signed agreements for lease (AFLs) from credit-tenants taking space on completion. A 10,000 sqm industrial development with a single AFL from a national 3PL operator on a 10-year lease at market rent is a vastly more bankable proposition than the same project on a speculative build basis. Many specialist industrial lenders effectively require a minimum 50–60% precommitment by lettable area before drawing the construction facility.

The single most material structural decision in any development financing is the bank versus non-bank lane. The two markets have completely different risk appetites, completely different presale requirements and completely different pricing — and they suit different projects.

The 200–500 bps pricing gap between bank and non-bank looks enormous on paper, but on a development with a 12–18 month build period the actual cost difference is often more like 3–7.5% of TDC — material, but not always the deciding factor. For projects that simply cannot meet bank presale requirements, the non-bank lane is the only viable lane regardless of pricing. For projects that can meet bank requirements, the calculation becomes whether the additional 5–10% of debt capacity that non-bank provides is worth the pricing differential.

Once the facility is settled and construction commences, the active management of the loan moves into a different rhythm. Funds are drawn against construction milestones rather than in a single advance, and each drawdown requires QS sign-off, builder progress claim verification and lender approval. The administrative tempo is typically a monthly drawdown cycle with a two to four week review window per draw.

Drawdown process

1. Builder issues progress claim based on the agreed payment schedule (typically aligned to construction milestones)
2. Independent QS inspects site and certifies works completed to the value claimed
3. Sponsor submits drawdown notice to lender with QS report and builder invoice
4. Lender reviews against facility conditions (no cost overruns, no programme slippage, no covenant breach)
5. Lender draws against the facility and pays builder directly (most common) or via sponsor account
6. Capitalised interest accrued in the period is added to the loan balance

Retention and cost-overrun mechanics

Most facilities require a retention reserve — typically 5–10% of progress claims withheld until practical completion — to fund any defect rectification. Cost overruns are managed against the contingency reserve built into the original feasibility (typically 5–7.5% of construction cost). Overruns beyond the contingency must be funded by sponsor equity injection; lenders rarely top up the facility mid-construction. Persistent overruns can trigger covenant breaches and, in extreme cases, lender appointment of an external project manager.

Pre-sold residential or mixed-use

The simplest exit. On practical completion, contracted purchasers settle, sale proceeds discharge senior debt first, then mezzanine, with any residual flowing to sponsor equity. Residual unsold stock (typically 10–25% of the project) is either sold on the spot market or refinanced to a residual stock facility on a 12–24 month tail.

Refinance to investment debt

Commercial-only developments (office, industrial, retail) typically refinance on completion into investment-stabilisation debt against the stabilised income. The construction facility runs for the build period plus a 6–12 month stabilisation tail to allow income to ramp up to the level that will support investment-grade serviceability. Selecting a lender at the construction phase whose investment arm can take the takeout often improves terms on both sides of the transaction.

Portfolio recapitalisation

Larger, established developers often complete projects into portfolio facilities — the completed asset is added to a broader investment portfolio and financed against the portfolio's blended income and security pool. This structure spreads risk and typically prices materially tighter than asset-by-asset refinance for sponsors with sufficient scale.

1. Approaching lenders with an incomplete feasibility — guarantees punitive terms or outright decline
2. Underestimating soft costs (council contributions, marketing, finance fees) — typically 20–25% of TDC, often modelled at 10–15%
3. Choosing a builder primarily on price — D&C variation risk on cheap builders consistently destroys margins
4. Ignoring presale quality — a contract book full of overseas purchasers or extended-settlement deals collapses on lender review
5. Capitalising interest at sponsor-optimistic assumptions — lenders re-cost capitalised interest at the stressed rate, which can blow LTC compliance
6. Failing to sequence pre-sales releases optimally — early stock sold cheap caps later release pricing and project margin
7. Engaging a generalist lawyer rather than a development-specialist on documentation — facility deed errors are rarely cheap to fix
8. Treating senior debt as a commodity and tendering on price alone — covenant flexibility on a problem project is worth materially more than 50 bps of pricing