Smart ways to approach commercial development finance

What Commercial Development Finance Covers

Commercial development finance is designed to fund the construction or renovation of income-producing properties, from multi-level office buildings to mixed-use retail and residential projects. Unlike standard commercial property loans, development finance is released progressively as construction milestones are met, which aligns repayments with your project timeline rather than requiring upfront capital for the full build.

Consider a Kew-based property developer planning to build a three-storey office building on a vacant block near High Street. The site is in a precinct that's seen steady commercial demand from professional services firms, and the developer has secured pre-lease interest from a legal practice. The lender structures the loan with progressive drawdown, releasing funds at the completion of each stage: land acquisition, slab and frame, lock-up, and practical completion. This means the developer pays interest only on the amount drawn at each phase, rather than the full loan amount from day one. At land acquisition, they draw $800,000. At slab and frame, they draw another $600,000. By lock-up, the total drawn is $1.6 million, and the final $400,000 is released at practical completion. The progressive structure keeps monthly interest costs manageable during the build and allows the developer to preserve working capital for other project expenses.

How Lenders Assess Commercial Development Applications

Lenders evaluate commercial development finance applications on feasibility, experience, and exit strategy. They will review your development proposal, project budget, pre-sales or pre-lease commitments, and your track record with similar projects. If you are a first-time developer, the lender will place more weight on the strength of the project itself and the expertise of your builder and project manager.

In a scenario where a Kew investor is converting an older warehouse on Normanby Road into a strata-titled commercial complex with four retail tenancies, the lender will assess the end valuation based on comparable strata title commercial sales in the area, the rental yield from similar retail spaces, and the investor's ability to either sell down individual units or hold and lease them. The lender may require a quantity surveyor's report, a detailed construction schedule, and evidence of council approval before approving the loan. If the investor has not completed a development of this scale before, the lender may cap the loan-to-value ratio at 65% rather than the typical 70% to 75%, requiring the investor to contribute more equity upfront. The investor provides $1.2 million in equity, and the lender approves a loan of $2.3 million, bringing the total project cost to $3.5 million. The additional equity requirement reflects the lender's risk assessment, but it also gives the investor a stronger negotiating position if they need to refinance or extend the loan during construction.

Commercial LVR and How It Affects Loan Structure

Commercial lenders typically offer development finance at 60% to 75% of the total project cost, depending on your experience, the quality of pre-commitments, and the location of the development. Higher pre-lease or pre-sale commitments can improve your borrowing capacity and reduce the lender's perceived risk, which may result in a higher loan-to-value ratio or more favourable loan terms.

If you are developing a site in Kew with strong tenant interest and formal lease agreements in place before construction begins, a lender may be willing to approve a loan at 70% or higher. If the development is speculative, with no pre-commitments, expect the LVR to sit closer to 60%, meaning you will need to contribute more equity. The difference between a 60% and 70% LVR on a $4 million project is $400,000 in additional equity, which affects both your upfront funding requirements and your return on investment once the project is complete.

Loan Structure Options for Development Projects

Commercial development finance can be structured with progressive drawdown, interest-only repayments during construction, and a range of exit options depending on whether you plan to sell, refinance, or hold the completed asset. Some lenders offer a single facility that covers both the land acquisition and construction phases, while others require separate loans for each component.

For a developer in Kew building a boutique office building with the intention to hold and lease, the loan might be structured with interest-only repayments during the 18-month construction period, followed by a transition to a standard commercial property loan once the building is completed and tenanted. The exit from development finance to long-term commercial finance is typically triggered by practical completion and a satisfactory end valuation. If the completed building is valued at $5.2 million and the development loan was $3.5 million, the developer can refinance into a commercial property loan at 65% LVR, which equates to $3.38 million. This leaves the developer with a small shortfall to repay from equity or rental income, but it also means they can hold the asset without needing to sell down units to exit the higher-cost development loan.

What Happens If the Project Runs Over Time or Budget

Cost overruns and construction delays are common in commercial development, and lenders typically build in a contingency buffer when assessing the loan application. If your project does run over time or budget, you may need to request a loan extension or additional funding, both of which will be subject to the lender's reassessment of the project's viability.

If a Kew-based developer encounters a three-month delay due to weather or supply chain issues, the interest-only period may need to be extended, which increases the total interest cost over the life of the loan. If the delay also results in cost overruns, the developer may need to either inject additional equity or negotiate a top-up facility with the lender. Lenders will typically grant extensions if the project is still tracking toward a viable outcome, but they may increase the interest rate or require additional security. In one scenario, a developer was approved for a 12-month construction loan at a variable rate, but the project took 16 months to complete. The lender extended the loan for an additional four months at a slightly higher rate, and the developer paid an extension fee equivalent to 0.5% of the outstanding balance. The alternative would have been to sell the partially completed project or bring in a joint venture partner, both of which would have been more costly.

How Commercial Development Finance Differs from Residential Development Finance

Commercial development finance is assessed on the income potential of the completed asset, while residential development finance is typically assessed on pre-sales and end valuation. Commercial lenders place more weight on the strength of lease agreements, tenant quality, and the location's commercial fundamentals, whereas residential lenders focus on buyer demand and comparable sales.

In Kew, where there is consistent demand for professional office space and ground-floor retail near High Street and Glenferrie Road, a commercial development with strong pre-lease commitments may be viewed more favourably than a residential development in the same location. The lender will assess the commercial development based on the rental yield and the creditworthiness of the tenants, rather than relying solely on a valuation of the completed building. This can make it easier to secure development finance for commercial projects in established business precincts, particularly if the development fills a gap in the local market.

Choosing Between Fixed and Variable Interest Rates

Commercial development loans are most commonly structured with variable rates, as the loan term is relatively short and the progressive drawdown structure makes fixed rates less practical. However, some lenders offer fixed-rate options or hybrid structures where part of the loan is fixed and part remains variable.

If you are concerned about rate movements during the construction period, a fixed rate can provide certainty over your monthly interest costs, but it may also come with restrictions on early repayment or refinancing. A variable rate offers more flexibility and allows you to repay the loan early without penalty, which is useful if your project completes ahead of schedule or if you secure refinancing sooner than expected. In the current environment, where rates are subject to change, many Kew-based developers opt for variable rates to retain flexibility, particularly if they have a clear exit strategy and expect to transition to long-term commercial finance or sell the asset within 18 to 24 months.

What Pre-Settlement Finance Covers in a Development Context

Pre-settlement finance is a short-term funding solution that covers the gap between when a buyer exchanges contracts on a completed development and when they settle. This is particularly relevant for developers who have sold units or tenancies off the plan and need to complete construction before settlement occurs.

If a Kew developer has sold two of the four retail tenancies in a strata-titled complex before construction is complete, they may use pre-settlement finance to cover the final stages of the build while waiting for the buyers to settle. The lender advances funds based on the exchange price, and the loan is repaid from the settlement proceeds. This allows the developer to complete the project without needing to inject additional equity or delay construction, and it ensures that the sales proceed as planned.

Working with a Commercial Finance Broker in Kew

A broker who works regularly with commercial development projects can help structure your application, identify lenders who are active in the Kew area, and negotiate loan terms that align with your project timeline and exit strategy. Brokers also have access to lenders who specialise in development finance and can provide solutions that go beyond what the major banks offer.

In our experience, developers who engage a broker early in the process are more likely to secure finance on favourable terms, particularly if the project is complex or involves multiple funding sources. A broker can also coordinate with your solicitor, accountant, and builder to ensure that the loan structure supports the overall project plan, rather than working against it. For Kew-based projects, where property values and commercial demand are well established, a broker with local knowledge can also provide insight into which lenders are most active in the area and how they assess development applications in this market.

Call one of our team or book an appointment at a time that works for you to discuss how commercial development finance can be structured for your Kew project.

Frequently Asked Questions