Development finance for first-time developers: what to know

What is development finance?

Development finance is lending that funds the purchase and construction of a property project. That can be a few townhouses on a suburban block, a small apartment building, a commercial fit-out or a subdivision. Unlike a standard property loan, it is usually advanced in stages, with funds released as work is completed rather than in one lump sum.

The lender is backing a project that does not yet exist. That is why the assessment looks different from a home or commercial property loan. The borrower matters, but so do the feasibility, the builder, the approvals, the timetable and how the project will be repaid when it is finished. Business.gov.au says lenders consider financial health, ability to repay and security. In development finance, the “security” is partly a building that has yet to be built.

If you are weighing a first project, this guide covers what lenders tend to look for, how to present the project and where first-time developers most often stumble. For the product itself, see our page on development finance.

Why are lenders cautious about first-time developers?

Development carries more risk than buying an existing property. Costs can blow out, approvals can take longer than expected, builders can fail, markets can move and finished properties may not sell at the forecast price. Experienced developers have seen those problems before and know how to manage them. A first-timer has not.

Lenders respond by asking for more reassurance. Typical areas where a first project is assessed more closely include:

• Experience. Has the borrower, or the team around them, delivered similar projects before?
• Scale. Is the project sensible for a first effort, or is it a leap?
• Equity. How much of the borrower’s own money is at stake?
• Contingency. Does the budget allow for things going wrong?
• Exit. Is the sale or refinance plan realistic and evidence-based?

Inexperience is not a barrier in itself, but it raises the bar for everything else in the application.

What do development lenders want to see?

A strong first application usually includes:

Item	Why it matters
Feasibility study	Shows costs, revenue, margin and the assumptions behind them
Council approvals or a clear path to them	Confirms the project can legally proceed
Plans and specifications	Show what will be built
Builder’s credentials and contract	Shows who is delivering the work and at what price
Quantity surveyor’s cost report	Independent view of the construction budget
Evidence of demand	Pre-sales, pre-leasing or market evidence
Borrower’s contribution	Land equity or cash that shows commitment
Borrower’s financial position	Income, assets, existing debt and credit history
Exit strategy	Sale of completed units or refinance to a long-term loan
Project team details	Architect, project manager, solicitor, accountant and agents

Business.gov.au notes that lenders often want a business plan, financial reports and forecasts. For a development, the feasibility plays that role. A realistic, conservative feasibility often does more for an application than an ambitious one.

How do you build a credible feasibility study?

A feasibility study is the numbers behind the project. It should cover:

1. Site costs. Purchase price, duty, legal fees and holding costs.
2. Approval and design costs. Planning, architecture, engineering and council fees.
3. Construction costs. Based on quotes or a cost consultant, not guesses.
4. Finance costs. Interest and lender fees over the project timeline.
5. Selling or leasing costs. Agent fees, marketing and legal costs.
6. Tax. GST treatment and any other tax considerations.
7. Contingency. A buffer for things that go wrong.
8. Revenue. Realistic sale or rental values supported by comparable evidence.
9. Margin. What is left, and how sensitive it is if costs rise or values fall.

Lenders read the sensitivity as closely as the headline. A project that only works if everything goes right is a warning sign. One that still stacks up after a cost rise or a price drop is far more convincing.

How do GST and the margin scheme affect a development?

Tax can swing the numbers, and the ATO is the place to start for the rules. Speak to an accountant or tax adviser early, since the answers depend on the specific facts.

Points the ATO makes for builders and developers of new residential premises include:

• If you build new residential premises for sale, you are liable for GST on the sale.
• You can generally claim input tax credits on construction costs and related purchases, subject to the normal rules.
• Eligible sellers can use the margin scheme, paying GST on the margin rather than the full sale price. For property bought on or after 1 July 2000, the margin is generally the sale price less the purchase price, with the GST being one-eleventh of that margin.
• If new premises are rented for five years or more, a later sale is input-taxed and credits may need to be reversed.
• The ATO page covering building and construction was last updated in 2020, so confirm current guidance before relying on it.

There is also GST withholding at settlement. For contracts entered into from 1 July 2018 for new residential premises and potential residential land, the purchaser generally withholds an amount and pays it to the ATO at settlement, and the seller must give written notice before settlement. Commercial property is among the exclusions. These rules affect cash flow at the exit, which is why they belong in the feasibility.

How is development finance structured?

Structures vary, but many projects involve some combination of:

• Land or acquisition funding. Finance for buying the site, often with the borrower contributing equity.
• Construction funding. Released in stages as work is completed and certified, sometimes after an inspection or a quantity surveyor’s report.
• Interest capitalisation. Some structures allow interest to be added to the loan during construction rather than paid monthly, which can help cash flow. Terms depend on the lender.
• Mezzanine or second mortgage funding. An additional layer of finance behind the main lender to reduce the equity the borrower must contribute. This is more expensive and more complex, and it needs the first lender’s agreement. See second mortgages.
• Bridging finance. Short-term funding to secure the site or cover a gap before longer-term finance is in place. See bridging finance.
• Exit finance. A refinance onto a term loan once the project is complete, particularly for investors who plan to keep the property.

For smaller residential builds and owner-builder projects, construction loans and land and construction loans may be the more suitable product. For larger commercial builds, see commercial construction loans.

What can first-time developers do to improve their chances?

There is no shortcut, but several moves consistently help.

1. Start modestly. A duplex or small townhouse project is a more believable first step than a large apartment building.
2. Build the right team. An experienced builder with a track record, plus a good project manager, architect and solicitor, offsets the borrower’s lack of experience.
3. Use a fixed-price contract. Where possible, a fixed-price building contract with a reputable builder reduces cost risk.
4. Bring more equity. A bigger contribution, including existing land, lowers the lender’s exposure.
5. Show demand. Pre-sales, pre-leasing or credible agent evidence supports the exit.
6. Plan the contingency. Lenders prefer budgets with room to move.
7. Prepare the exit. Know whether the plan is to sell, hold or refinance, and what happens if the market is slower than expected.
8. Get tax advice early. GST and structure can change the numbers materially.

Illustrative example: a first duplex project

This is an illustrative scenario only. A tradesperson owns a suburban block with an older house and wants to replace it with two townhouses. They have not developed before. Their equity is the land. They plan to sell both on completion.

A broker would likely check the feasibility with them, confirm the council position, review the builder’s fixed-price contract and talk through the exit. The lender may focus on whether the sale values are realistic, whether the builder is solid and whether the contingency is large enough. If the borrower’s contribution is thin, a lender with an appetite for this kind of project, or a different structure, might be needed. A modest project, a strong builder and a conservative plan give a first-timer the best chance of a yes.

What mistakes do first-time developers make?

• Optimistic sale values. Using the best-case price rather than a conservative one.
• Thin contingency. Overruns are common, and a lender will want to see a buffer.
• Ignoring holding costs. Interest, rates and insurance continue while building and selling.
• Choosing a weak builder. A builder’s failure can stall a project and the finance with it.
• Skipping tax advice. GST and margin scheme choices affect cash flow and returns.
• Starting too big. A project beyond the borrower’s experience can be hard to finance and harder to manage.
• No plan if sales are slow. Without a fallback, such as a refinance into a longer loan, a delay becomes a crisis.
• Leaving finance until late. Lenders need time, and approvals and conditions should line up with the contract.

What if the bank declines your development?

A decline from a major lender is common for first-time projects and does not mean the project is unworkable. Bank policy often has limits on experience, pre-sales and project type that sit outside what the project’s merits would suggest.

Options can include non-bank and specialist development lenders, mezzanine or second mortgage layers to reduce equity requirements, bridging to secure the site while longer finance is arranged, or restructuring the project. Our page on mixed-use property loans covers one type of project that often needs this kind of specialist view. None of these are guaranteed, and the costs and conditions vary.

How does Ownright help first-time developers?

Ownright Custom Finance arranges development and commercial finance Australia-wide from its Knoxfield, Victoria head office. Director Trevor Scott has more than 40 years in finance, and the team regularly works with borrowers whose projects do not fit a bank’s template.

For a first-time developer, that usually means reviewing the feasibility and team before approaching lenders, working out which lenders are comfortable with the experience level and the project type, and structuring the funding so that it fits the build timetable. It also means being plain about what could go wrong. Ownright cannot promise approval, and every loan is priced on individual circumstances. What it can do is find options other brokers may not know exist. In the team’s words, if Ownright can’t find the solution, no one can.

How are progress payments checked during construction?

Because funds are released in stages, the lender needs to know the work has actually been done. A typical process involves the builder issuing a progress claim, an independent quantity surveyor or inspector visiting the site to certify the percentage completed, and the lender releasing the next instalment after the claim is checked. Some lenders also require evidence that earlier stages have been paid for and that trades and suppliers are not owed money that could lead to claims against the property.

For a first-time developer, this rhythm affects cash flow. Costs often fall due before the lender has released the funds, so the borrower’s own contribution may need to cover a small buffer. Understanding the claim timetable with the builder at the start prevents arguments later. Our guide on construction loan progress payments explains how staged funding works for residential builds, and the commercial process follows a similar pattern.

What approvals and insurances should be in place?

Lenders usually want to see planning and building approvals, or a clear path to them, before releasing construction funds. They also commonly look for builder’s warranty or home warranty insurance where required, contract works insurance, public liability cover and appropriate licences for the builder. Whether a particular requirement applies depends on the state or territory, the type of project and the lender, so a solicitor and the builder should confirm what is needed early. Missing paperwork is a common cause of delay at the very time the borrower wants to start.

Ready to talk about your first project?

If you have a site and a plan, start an application with the location, the intended build, your budget and what you can contribute. We can talk through realistic funding structures and what the lender is likely to want. And if you are still shaping the idea, talk to us about your situation early, because early finance advice often improves the project itself.