Commercial development finance releases funds in stages as construction progresses, not as a lump sum at settlement.
Queensland developers use this funding structure to build everything from retail strips in Cairns to industrial warehouses in Mackay, and the loan mechanics differ significantly from residential construction or standard commercial property loans. The timing of each drawdown, the valuation requirements between stages, and the interest capitalisation options all affect whether your project stays on budget or blows out before practical completion.
How Progressive Drawdown Works in Practice
The lender releases funds at predetermined construction milestones, typically slab down, frame up, lock-up, fixing stage, and practical completion. Each drawdown requires a quantity surveyor report or builder certification confirming the stage is complete, and most lenders will only release funds up to the percentage of work verified.
Consider a developer building a three-unit retail complex in Townsville. After settling the land acquisition component, the first construction drawdown releases at slab completion. The builder invoices for foundation work totalling $180,000, the quantity surveyor certifies the stage, and the lender advances funds. If the QS report values completed work at $165,000 instead, the lender releases that amount and the developer covers the gap. This process repeats at each milestone, and any cost overrun compounds through subsequent stages unless the developer injects additional equity.
The structure protects the lender by ensuring funds match actual construction progress, but it also means your cash flow depends on documentation turnaround times. A delayed QS report can hold up the next builder payment, and most commercial builders include penalty clauses for late payments.
LVR Limits and Presale Requirements for Development Projects
Lenders typically cap development finance at 65% to 75% LVR depending on the project type and your development experience. That ratio applies to the combined land and construction cost, which means a $2 million project at 70% LVR requires $600,000 in equity or presales to cover the remaining 30%.
Some lenders will increase the LVR to 80% if you secure presale contracts for a portion of the development. A presale is a binding contract to sell a completed unit or tenancy, usually conditional on practical completion and settlement within a specified timeframe. For strata title commercial developments, two presales out of five units might lift your borrowing capacity enough to reduce the equity requirement by $150,000 to $200,000, depending on the presale values and lender policy.
Presales also improve your refinancing position if rates move or you want to restructure debt after completion. A development with signed tenants or owner-occupiers carries less risk than a speculative build, and that affects both your initial approval and your exit strategy.
Interest Capitalisation and Holding Costs During Construction
Most development finance structures allow you to capitalise interest during the construction period rather than servicing it from operating income. The lender adds accrued interest to the outstanding loan balance each month, and you repay the total amount at project completion or when you refinance into an investment loan.
This structure works if your project timeline is accurate and your end valuation supports the increased debt. If construction runs six months over schedule, you capitalise an additional six months of interest on the full drawn amount, which can add $40,000 to $70,000 to a $1.5 million loan depending on the rate. That reduces your equity position at completion and may push your LVR above the threshold needed to refinance without injecting more capital.
Some developers use a split structure where they capitalise interest on the construction portion but service interest on the land acquisition loan from day one. This keeps the overall debt lower and demonstrates serviceability to the lender, which can improve approval terms if your borrowing capacity is marginal.
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Valuation Timing and Cost-to-Complete Calculations
Lenders require an 'as if complete' valuation before approving development finance, and that figure determines your maximum loan amount. The valuer assesses the projected end value based on comparable sales, proposed tenancies, and current market conditions, then the lender applies the LVR to that figure minus any presale deductions.
If the valuation comes in below your feasibility estimate, your borrowing capacity drops and you either reduce the scope or increase equity. A warehouse development valued at $2.8 million supports a 70% LVR loan of $1.96 million, but if the valuer assesses it at $2.5 million, your maximum loan drops to $1.75 million. That $210,000 difference comes from your equity or forces a redesign.
Most lenders also track cost-to-complete throughout the build. At each drawdown stage, they calculate remaining construction costs against remaining approved funds. If cost overruns reduce the buffer below the lender's comfort threshold, they may halt further drawdowns until you inject additional capital or provide an updated QS report showing revised costs.
Security Structure and Cross-Collateralisation for Experienced Developers
Development finance requires security over the development site, but lenders also assess your overall asset position and may ask for additional security if the project LVR sits at the higher end or if you have limited development history. Cross-collateralising another commercial property or investment property can increase your borrowing capacity, but it also means that property is locked to the development loan until you discharge the debt.
In a scenario where a developer owns an industrial property in Mackay valued at $1.2 million with $400,000 in remaining debt, using it as additional security for a retail development in Cairns increases the total security pool and may lift the development LVR from 65% to 70%. The trade-off is that both properties remain encumbered until the development loan is repaid or refinanced, which limits flexibility if you want to sell the Mackay property during construction.
Some developers prefer to keep security separate by accepting a lower LVR and funding the equity gap through business loans or mezzanine financing. This keeps the development site as the sole security and allows you to transact on other assets without lender consent.
Exit Strategy and Takeout Finance Options
Development finance is short-term funding, typically 12 to 24 months, and you need a clear exit before the lender approves the facility. Most developers either sell the completed project, refinance into a long-term investment loan, or use a combination of both if the development is strata-titled.
If you plan to hold the property and lease it, the lender will assess your refinance serviceability based on projected rental income. A completed warehouse generating $120,000 annual rent supports a different loan structure than a development loan, and the interest rate typically drops once the project moves from construction risk to investment income. The refinance also resets the LVR based on the completed valuation, so if your project has increased in value during construction, you may access additional equity without selling.
For strata developments, selling individual units at completion repays the development loan in stages, but you need a sales strategy that aligns with your loan expiry. If you have three units remaining unsold at the 18-month mark and your development loan matures in six months, you either accept below-market offers to clear the debt or negotiate an extension with the lender, which usually comes with a higher interest rate and additional fees.
Call one of our team or book an appointment at a time that works for you. We structure commercial finance for Queensland developers and match your project to lenders who fund the build type and location you're working with.
Frequently Asked Questions
What is progressive drawdown in commercial development finance?
Progressive drawdown releases loan funds at specific construction milestones such as slab down, frame up, and lock-up, rather than as a lump sum at settlement. Each drawdown requires certification from a quantity surveyor or builder confirming the stage is complete before the lender advances funds.
How does interest capitalisation work during construction?
Interest capitalisation allows you to add accrued interest to the loan balance each month instead of making interest payments during construction. You repay the total amount, including capitalised interest, at project completion or when you refinance into a long-term loan.
What LVR can I expect on a commercial development project?
Lenders typically offer 65% to 75% LVR on commercial development projects, depending on your experience and the project type. Presale contracts for part of the development can increase the LVR to 80% with some lenders, reducing your equity requirement.
Do I need an exit strategy for development finance?
Development finance is short-term funding, usually 12 to 24 months, so lenders require a clear exit strategy before approval. Your options include selling the completed project, refinancing into an investment loan based on rental income, or a combination of both for strata-titled developments.
What happens if construction costs exceed the original estimate?
If construction costs overrun, you need to inject additional equity or provide an updated quantity surveyor report showing revised costs. Lenders track cost-to-complete at each drawdown stage and may halt further funding if the remaining buffer falls below their threshold.
