What Are Your Commercial Development Finance Options?

If you plan to build or develop commercial property on the Far South Coast, the loan will work differently from a normal property loan. The bank lends in stages as the work gets done, and it will want to see your plans, your costs and your exit before it says yes.

This article is for local business owners and landowners weighing up a development, such as a small warehouse, a few shop fronts or a block of units for rent. We will keep it straight and practical.

What Is Commercial Development Finance?

Commercial development finance is a loan that pays for building or substantially improving a commercial property, with money released in stages as work is completed. It is different from a standard commercial property loan, which usually funds a building that already exists.

Lenders look at the project as a whole. They want to know what the land is worth, what the finished building will be worth, who is building it and how you plan to repay the loan. Our commercial loans page covers the wider range of lending we arrange, and development is one part of it.

How Does Progressive Drawdown Work?

With progressive drawdown, the lender pays out the loan in stages as each part of the build is finished and checked, rather than handing over everything on day one. You normally pay interest only on the amount drawn so far.

The usual stages are things like slab, frame, lock-up and completion, although each lender sets its own. A valuer or quantity surveyor generally inspects the work before each payment is released. The trade-off is timing. If a builder is waiting on payment and the inspection is delayed, the project can stall, so it pays to build some breathing room into your cash flow.

Our construction loans page explains the staged payment process in more detail.

How Much Can You Borrow for a Commercial Development?

The amount you can borrow depends on the lender's valuation, the type of project and how much of your own money goes in. Commercial lenders usually lend a lower share of value than home loan lenders, and the ratio varies by lender and by property type.

Your own contribution can be cash or equity in land or property you already own. That is useful for locals who already hold a block. Lenders will also look at your income, your other debts and how well the finished property is likely to rent or sell. You can get a rough idea of your position with our borrowing capacity tool.

A Local Example: Turning Spare Land into Rental Sheds

Consider a tradesman who owns an unused block of commercial-zoned land outside a South Coast town and wants to build four small storage and workshop units to lease out.

He has no cash left over after buying the land, so he worries he cannot fund the build. The land already has equity in it. A broker lines up a lender that accepts the land as part of his contribution and sets up a staged loan with interest-only repayments while the building goes up.

As an illustration only, say the loan is $900,000 at 6.75% p.a. If all of it were drawn, interest-only repayments would be $900,000 x 6.75% = $60,750 a year, or about $5,063 a month. During the build, though, he would pay less, because interest applies only to the amount drawn so far.

Once the units are finished and leased, the lender will review the loan. Subject to its approval, valuation and a serviceability check on the full loan, he may be able to move to a longer-term loan with principal and interest repayments. These will be higher than the interest-only repayments, and he should check that rent and other income can cover them. Refinancing may involve fees. The risk is that the units sit empty longer than planned, so he keeps a few months of repayments set aside.

Should You Use Bridging Finance or a Construction Loan?

A construction loan suits a build you have planned and costed, while bridging finance suits a short gap, such as needing to buy land before you have sold another property. Bridging is short term and usually costs more, so it only makes sense when you have a clear way to repay it.

If you have your plans ready and the land is yours, a construction loan will usually fit better. If you are waiting on a sale to settle and do not want to lose the block, bridging may cover the gap. Ask what happens if the sale takes longer than expected, because that is where bridging gets expensive.

Will the Bank Want Security Over Other Property?

Often, yes. Lenders commonly ask for security over the land and the project, and sometimes over other property you own. If you offer more than one property as security, a problem with the project can put those other assets at risk.

Some lenders will lend on a project alone if you have a solid deposit and a strong plan. It is worth asking for both options, so you can compare what you are putting on the line. If you have a fixed or variable rate decision to make, we can talk through how each would suit your build and your cash flow.

What Do Lenders Want to See Before They Approve a Development?

Lenders want to see that the project makes sense on paper and that you can see it through. That generally means council approval or a clear path to it, a costed build, a registered builder and a realistic plan for repayment.

They will also check your financial position. A loan health check before you apply can show you where you stand and what to tidy up first. If your business is expanding alongside the project, our business loans page covers other finance that can sit alongside it.

Talking to a broker early gives you time to fix gaps before a lender sees them.

Frequently Asked Questions