What Commercial Development Finance Covers
Commercial development finance funds the construction or redevelopment of income-generating property. The loan releases funds in stages as construction progresses, which means you only pay interest on what's been drawn down, not the full loan amount from day one.
This structure works whether you're building a warehouse from the ground up, converting an office building into strata title units, or adding a second storey to an existing retail property. The lender ties drawdowns to milestones like slab pour, frame completion, or lockup stage. You provide evidence the work is done, the lender inspects, and the next portion of funds releases.
In our experience, borrowers often need two facilities running in parallel. One covers land acquisition, the other funds construction. If you're buying an existing commercial property to demolish and rebuild, commercial bridging finance can cover the purchase while development approval is finalised, then roll into a construction facility once the project starts.
How Loan Structure Matches Project Timing
A progressive drawdown means you're not paying interest on $2 million when only $400,000 has been spent. Each time the builder hits a milestone, the lender releases the next tranche. Interest accrues on the drawn balance, which keeps costs lower during the early stages when cash flow is tightest.
Consider a business acquiring industrial land to build a distribution centre. The land costs $800,000, construction is budgeted at $1.5 million. The lender structures it as a $2.3 million facility. The first drawdown covers the land purchase. Subsequent drawdowns release as the slab is poured, steel framework goes up, and fit-out completes. Over the 12-month build, interest compounds only on what's been used, rather than the full amount. Once the centre is finished and tenanted, the facility refinances into a standard commercial property loan with principal and interest repayments.
What Lenders Look For in a Development Application
Lenders assess the finished asset, not just the project cost. They want to know the completed property will generate enough rental income to service a permanent loan, or that there's a buyer ready to settle on completion. If you're building to hold, they'll model the projected rental yield against the loan amount. If you're building to sell, they'll want evidence of pre-sales or a valuation showing the end value covers the debt.
Most lenders cap commercial development finance between 65% and 75% of the total project cost, which includes land, construction, and fees. That means you need equity or cash to cover the gap. If the project runs over budget, the lender won't automatically increase the facility. The funding stops at the approved limit, so contingency planning matters.
Collateral usually includes the land being developed, plus additional security if the loan to value ratio pushes past 70%. If you own other commercial property or business assets, those can be used to support the application. Lenders also review your experience. If this is your first build, they'll want a builder with a strong track record and a quantity surveyor's report confirming the budget is realistic.
Interest Rates and Capitalisation During Construction
Commercial interest rates for development finance sit higher than standard property loans, typically between 1% and 2% above the lender's variable rate for investment property. The rate reflects the higher risk during construction, when the asset isn't yet income-producing.
Most lenders allow interest to capitalise during the build, which means it's added to the loan balance rather than paid monthly. Once construction finishes and the property is tenanted or sold, the capitalised interest gets repaid as part of the refinance or settlement. This keeps cash flow intact while the project is underway, but it does increase the total debt.
Some lenders offer a combination of fixed and variable rates, with the construction phase on a variable interest rate and the option to fix once the loan converts to a standard facility. That structure gives you flexibility during the build and certainty once the property is generating income.
When Pre-Settlement Finance Fits the Timeline
If a buyer is lined up but settlement is months away, pre-settlement finance can cover the gap between project completion and final sale. The lender advances funds based on the signed contract, which lets you repay the construction loan and avoid holding costs while waiting for the buyer's finance to settle.
This structure works when you've sold units off the plan or secured a tenant on a long lease who's ready to purchase the property once built. The loan term is short, often three to six months, and the rate is higher because it's a bridging product. But it removes the risk of paying interest on a completed project while waiting for settlement.
How Equity in Existing Property Supports Development
If you own commercial property with available equity, that can cover the deposit or cost overruns without needing to sell assets or bring in external investors. The lender takes a second mortgage over the existing property, which increases the loan amount but keeps the project moving.
As an example, a business owns a warehouse valued at $1.8 million with a $600,000 loan against it. That leaves $1.2 million in equity. They want to build a second warehouse on vacant land they've purchased for $500,000, with construction costs of $900,000. The lender structures a $1.05 million development facility, secured against both the existing warehouse and the new site. The equity covers the 25% deposit and gives a buffer for contingency costs. Once the second warehouse is finished, both properties secure a single refinanced loan with standard repayment terms.
This approach avoids mezzanine financing or bringing in partners, but it does mean your existing property is tied up until the development is complete. If the project stalls, both assets are at risk.
What Happens When the Build Runs Over Time or Budget
Construction delays or cost blowouts are common enough that lenders build review points into the loan terms. If the project extends past the agreed timeline, the lender may charge an extension fee or increase the interest rate. If costs exceed the approved budget, you'll need to cover the shortfall from your own funds or renegotiate the facility.
Flexible loan terms matter during this phase. Some lenders allow a contingency drawdown if you've built it into the original application. Others require a formal variation, which can take weeks to approve. The loan structure should account for at least a 10% buffer on construction costs and a three-month extension on timing.
If the project completes early and under budget, most lenders allow early repayment without penalty during the construction phase, since the facility is typically on a variable interest rate. Once it converts to a fixed-rate loan, standard break costs apply.
Moving from Development Finance to Permanent Lending
Once construction is finished and the property is tenanted or ready for sale, the development facility refinances into a long-term loan or gets repaid from the sale proceeds. If you're holding the property, the lender reassesses based on the completed asset. The new loan will have a lower interest rate, principal and interest repayments, and flexible repayment options tied to rental income.
The refinance process involves a final valuation, lease agreements if the property is tenanted, and updated financials showing the business can service the debt. If the property has increased in value during construction, the loan to value ratio improves, which can unlock better rates or release equity for the next project.
If you're selling, the buyer's settlement funds repay the development loan. Any profit after repayment and costs flows back to the business. Timing the sale to align with loan maturity avoids holding costs, but it also means the project needs to be market-ready when the facility term ends.
Call one of our team or book an appointment at a time that works for you to review how a development facility fits your project timeline and funding structure.
Frequently Asked Questions
What does commercial development finance cover?
Commercial development finance funds the construction or redevelopment of income-generating property. The loan releases funds in stages as construction progresses, so you only pay interest on what's been drawn down.
How does a progressive drawdown work?
A progressive drawdown releases funds as the builder hits milestones like slab pour or frame completion. You pay interest only on the amount drawn, not the full loan, which keeps costs lower during early construction stages.
What do lenders assess in a development application?
Lenders assess the finished asset's ability to generate rental income or its sale value on completion. They also review your experience, the builder's track record, and whether the budget is realistic.
Can interest be capitalised during construction?
Most lenders allow interest to capitalise during the build, meaning it's added to the loan balance rather than paid monthly. This keeps cash flow intact but increases the total debt.
What happens if construction runs over budget?
If costs exceed the approved budget, you'll need to cover the shortfall from your own funds or renegotiate the facility. Lenders typically won't automatically increase the loan amount.
