Development
Funding a property development, from feasibility to exit
Development finance is lent against a project rather than against a person. The funder is looking at the site, the feasibility, the builder and how the money comes back, and your own position is only one input.
Written by Gavin Harrigan, Managing Director
Broking since 2005, four-time Top 100 broker and a PLAN Australia Hall of Fame member.
Published
Key takeaways
The things worth rememberingA funder lends against the project's numbers, not only against your income
The feasibility is the document that decides the outcome, so it gets tested hardest
Funding is sized against both the cost to build and the value on completion
Bank, non-bank and private funding trade cost against speed and flexibility
A quantity surveyor and a valuer are part of the process, not optional extras
The exit is agreed before the first drawdown, because that is how the money comes back
That is why a project declined by one funder is often funded comfortably by another. Appetite for a site, a location or a project size differs enormously, and it moves with the market.
This guide covers what actually gets assessed, how the funding is sized, where bank, non-bank and private money differ, and why the exit is settled at the start.
The short answer
A funder assesses the project's feasibility, the site, the construction contract and the exit, then sizes a facility against both what the project costs to build and what it should be worth on completion. Money is drawn down as the project progresses.
Everything else follows from the feasibility. If those numbers do not survive scrutiny, no amount of borrower strength rescues the file.
What a funder actually assesses
There are four things on the table, and they are weighted differently by different funders. A project can be strong on three and fail on the fourth.
| What | What the funder is looking for |
|---|---|
| The feasibility | Costs, revenue and contingency that survive an independent review, with realistic assumptions rather than optimistic ones |
| The site | Zoning, approvals, planning conditions and whether the proposed development is genuinely deliverable on it |
| The build | A builder with the capacity and track record for a project of this type and size, and a contract that holds |
| You | Your experience with projects like this one, your equity contribution and your position if things run long |
Experience matters more here than on any other kind of lending. A first project is fundable, but it is assessed as a first project, and the terms will say so.
How the facility is sized
Development funding is measured against the project rather than against a single valuation. Funders look at the total cost to deliver and at the expected value once it is finished, and they lend against a proportion of each.
The lower of those two tests is usually the one that binds. That is why a project with a healthy end value can still be short of funding if the cost base is high.
The gap between what the funder lends and what the project costs is your equity, whether that is cash, the value of a site you already own, or both. Funders want to see that contribution genuinely in the project rather than promised.
Bank, non-bank and private funding
Three broad sources of development money exist and they are not competing for the same projects. Choosing the wrong one wastes months.
| Source | What you get | What it costs |
|---|---|---|
| Bank funding | The cheapest money, and the most process around it | The most conditions, the most documentation and often a presale requirement |
| Non-bank funding | More flexibility on presales, timing and project type | A higher cost than a bank, in exchange for that flexibility |
| Private funding | Speed and a willingness to look at projects others will not | The highest cost, and terms that need reading carefully |
The right answer depends on the project and on how much time you have. A site with a settlement deadline and no bank appetite is a private funding conversation, and paying more for money that arrives is better than paying nothing for money that does not.
The professionals in the process
Development finance brings in people who do not appear on a home loan. Each of them has a say in whether the funding proceeds.
- A valuer, assessing the site now and the project on completion
- A quantity surveyor, testing the cost plan and then certifying progress claims as the build runs
- The funder's own credit team, which will have questions the front-line contact cannot answer for them
- Your accountant and solicitor, on the entity structure and the security documents
- Your builder, whose contract and capacity are assessed as part of the file
Their reports become part of the facility. A quantity surveyor's certification is usually what releases each drawdown, so their timetable is your timetable.
Why projects get declined
Most declines are not a judgement on the site. They are a mismatch between the project and the funder it was taken to.
- The funder has no appetite for that project type, size or location at the moment
- The feasibility relies on assumptions the funder's own review will not support
- The equity contribution is thinner than the funder requires for a project of this risk
- Presale requirements cannot be met, and the funder will not waive them
- The exit is vague, or depends on conditions nobody can guarantee
- The builder is not acceptable to that funder for a project of this scale
The fix is usually to present the project to a funder with appetite for it, with the feasibility and the exit set out properly. That is the work, and it happens before anything is submitted.
Where to go next on this site
Development projects vary enough that each type has its own page. Find the closest to yours.
| Page | What it covers |
|---|---|
| /development-finance-perth/ | The development finance service, and how a project is taken to market |
| /development-finance-perth/residential-development-finance/ | Residential projects, from small infill upwards |
| /development-finance-perth/commercial-development-finance/ | Commercial and mixed-use projects |
| /development-finance-perth/land-subdivision-finance/ | Subdividing land, which funds differently from building on it |
| /development-finance-perth/private-development-finance/ | Private funding, and when it is the right call |
| /development-finance-perth/mezzanine-finance/ | Filling the gap between senior debt and your equity |
Smaller builds and the commercial end of a completed project are covered elsewhere.
| Page | What it covers |
|---|---|
| /guides/construction-finance-guide/ | How a construction loan works, for builds below development scale |
| /construction-finance-perth/ | Construction finance, including knockdown rebuild and owner-builder |
| /commercial-loans-perth/commercial-property-loans/ | Holding completed commercial stock on a term loan |
| /guides/commercial-finance-guide/ | Commercial lending generally, including how funders read an entity |
About the author
Gavin Harrigan
Managing Director
Gavin has been broking since 2005 and has made the Top 100 brokers list four times. He is a PLAN Australia Hall of Fame member, which is awarded for sustained excellence rather than a single good year.
Qualifications
- Bachelor of Commerce, Applied Finance and Commercial Law — Curtin University
- Diploma of Finance and Mortgage Broking Management — AAMC Training Group
- PLAN Australia Hall of Fame member
- Elite Broker status
- Top 100 Brokers, four times
Accredited across the 40+ lenders on the MoneyQuest panel and working under Australian Credit Licence 389083.
Read Gavin’s full profileQuestions people ask about this
How is development finance different from a construction loan?
A construction loan funds a single dwelling for an owner and is assessed largely on the borrower. Development finance funds a project intended to be sold or held commercially, and is assessed on the feasibility, the site, the builder and the exit as much as on the borrower.
How much equity do I need in a development?
It depends on the funder, the project type and your experience, and it is measured against the total cost to deliver rather than against the land value alone. A site you already own can form part of it. The requirement is set by the funder and varies considerably between bank, non-bank and private money.
Do I need presales to get development funding?
Bank funders commonly require a level of presales before drawing down; non-bank and private funders are often more flexible about it, at a higher cost. Whether presales are required is one of the main things that determines which funder suits a project.
What is mezzanine finance?
It is funding that sits between the senior debt and your own equity, used to bridge the gap when the senior facility does not cover enough of the project cost. It ranks behind the senior lender, which is why it is priced higher, and it has its own page on this site.
Can a first-time developer get funding?
Yes, though a first project is assessed as a first project and the terms reflect that. Funders look for a strong feasibility, a capable builder, a clear exit and a real equity contribution. Presenting it to a funder with appetite for first-time developers matters more than it does on any other kind of file.
Related guides
Other guides worth your timeThese overlap more than they look like they do. Most people end up reading at least two.
The information on this page is general in nature and does not take into account your objectives, financial situation or needs. Any figures shown are estimates only. Lending is subject to approval, and to the lender's terms, conditions, fees and charges. Consider whether the information is appropriate for you before acting on it.
Quantum Finance Australia Pty Ltd ABN 63 115 967 818 as trustee for the Gavin Harrigan Family Trust trading as Quantum Finance Australia is authorised under Australian Credit Licence Number 389083.
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