Development Loans in Australia

Development loans in Australia are a specialised form of private lending used to fund property development projects, including residential, commercial, and mixed-use developments.

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Private development finance is commonly used where traditional lenders are unable to support a project due to presale requirements, borrower structure, project complexity, or timing constraints. These facilities are assessed primarily on project feasibility, asset quality, and exit strategy rather than standard serviceability metrics.

 

This page explains how development loans work, when they are used, how private lenders assess risk, and how these facilities are structured.

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What Is a Development Loan?

A development loan is a loan facility used to fund the acquisition, construction, or completion of a property development project. In private lending, development loans are typically:

• Secured against the development site and related assets

• Structured to fund land acquisition, construction, or both

• Short to medium term in nature

• Assessed on feasibility, equity contribution, and exit strategy

 

Development loans differ from standard construction loans in that they assess the entire project lifecycle, including acquisition, construction, and realisation.

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When Are Development Loans Used?

Development loans are used when a project does not meet traditional bank criteria or requires a higher degree of flexibility. Common scenarios include:

• Developments without sufficient presales

• Projects requiring fast settlement on site acquisition

• Borrowers with complex ownership or entity structures

• Projects needing flexible draw schedules or capitalised interest

• Developments requiring interim funding pending refinance

 

Private development finance is typically used as transitional funding rather than permanent debt.

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How Private Lenders Assess Development Loan Risk

Private lenders assess development loans with a strong focus on downside protection and exit certainty.

Key considerations include:

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Project Feasibility

Lenders review:

• Development feasibility studies

• Costings, contingencies, and timelines

• Developer experience and track record

Feasibility assumptions must be conservative and well supported.

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Loan-to-Value Ratio (LVR)

Development loans are assessed on conservative LVR limits, often based on:

• As-is land value

• On-completion value

• Peak debt exposure during the project

Where development finance sits behind existing debt, it may involve a second mortgage loan, which increases risk and requires additional equity buffers.

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Exit Strategy

The exit strategy underpins every development loan. Acceptable exits commonly include:

• Sale of completed dwellings

• Refinance into an investment or long-term facility

• Partial sell-down to reduce debt

For a broader explanation of how exit strategies are assessed, see Private Lending in Australia.

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LVR and Security Considerations for Development Loans

Development loans involve layered risk due to construction exposure, market movements, and execution risk.

Private lenders typically require:

• Conservative valuations at multiple stages

• Strong equity contributions from the developer

• Clear buffers above peak debt

A first mortgage private loan may allow higher leverage once a project is completed and stabilised. During development, lenders apply tighter controls to manage risk.

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Exit Strategy Requirements

Every development loan must be structured with a realistic, time-bound exit.

Private lenders assess:

• Market demand for the completed product

• Pricing assumptions and absorption rates

• The developer’s ability to manage delays or cost overruns

Development loans are commonly declined where exits rely on optimistic sales assumptions or untested markets.

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Common Reasons Development Loan Applications Are Declined

Development loan applications may be declined for several reasons, including:

• Insufficient equity or contingency buffers

• Weak or unsupported feasibility assumptions

• Limited developer experience

• Over-leveraged structures at peak debt

• No clear or realistic exit strategy

These issues are structural and can often be addressed through improved planning and conservative structuring.

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How Development Loans Are Structured

Private development loans are typically structured as:

• Short to medium-term facilities, often 12 to 36 months

• Progressive drawdowns aligned with development milestones

• Interest-only or capitalised interest arrangements

• First or second mortgage security

Pricing reflects project complexity, development risk, funding speed, and loan duration. Development loans are designed to enable delivery rather than replace long-term finance.

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How Innovate Funding Structures Development Loans

Innovate Funding structures development loans by focusing on feasibility, risk management, and exit clarity.

This includes:

• Reviewing development feasibilities and costings

• Assessing peak debt and equity contributions

• Structuring draw schedules aligned with project stages

• Matching projects with appropriate private lenders

Each development loan is structured to support project delivery and a clean transition to the exit strategy.

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Development Loans – Frequently Asked Questions

Can private development loans fund land acquisition?
Yes. Many development loans fund land acquisition as well as construction, subject to feasibility and equity requirements.

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How quickly can development loans settle?
Once documentation and valuations are complete, settlement can occur within days.

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Do development loans require presales?
Not always. Presale requirements vary depending on project risk and lender appetite.

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Can development loans be refinanced after completion?
Yes. Development loans are commonly refinanced into longer-term facilities once the project is completed or stabilised.

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Are private development loans expensive?
They typically carry higher costs than bank development finance due to flexibility, speed, and risk profile.

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Understanding Your Options

Development loans play a key role in Australia’s private lending market by enabling projects to proceed where traditional funding is unavailable or unsuitable.

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When structured correctly, private development finance provides the flexibility required to deliver projects while maintaining a clear and realistic pathway to exit.

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For a broader understanding of how development loans fit within private finance, visit Private Lending in Australia.