Land development is one of the most profitable property investment strategies, but securing the right finance is critical. Here's everything you need to know about funding your development project.
What is Land Development Finance?
Development finance funds the purchase of land and construction of improvements - whether subdividing, building townhouses, or creating a full estate development.
Key Stages:
- Land acquisition: Purchasing the development site
- Planning/approvals: DA, engineering, council approvals
- Construction: Civil works, building, infrastructure
- Sales/exit: Selling completed lots or dwellings
Each stage requires different funding approaches.
Types of Development Finance
1. Land Purchase Loan
Purpose: Acquire development site LVR: Up to 70% (sometimes 80% with strong profile) Term: Interest-only, 6-24 months Rates: 7-12% p.a. Security: The land being purchased (and often existing property)
2. Development Finance (Full Project)
Purpose: Land + all development costs LVR: Up to 70-75% of GDV (Gross Development Value) Structure: Progressive drawdowns as works complete Term: 12-36 months Rates: 8-15% p.a. Security: Development site + personal guarantees
3. Mezzanine Finance
Purpose: Fill funding gap between senior debt and equity LVR: 70-85% combined Rates: 15-25% p.a. Risk: Higher, hence higher rates Use: When you lack deposit/equity
4. Joint Venture Equity
Not a loan: Equity partner funds project Return: Typically 20-50% profit share Benefit: No repayments, no interest Downside: Give up significant profit share
How Much Can You Borrow?
Key Metric: LVR on Gross Development Value (GDV)
Example Development:
- Land cost: $500,000
- Construction cost: $1,200,000
- Total development cost: $1,700,000
- Selling price (GDV): $2,500,000
- LVR: 70% of GDV = $1,750,000
Typical LVRs:
- Conservative banks: 60-65% GDV
- Private lenders: 70-75% GDV
- With mezzanine: up to 80-85% GDV
Your Equity Required: At 70% LVR: $750,000 equity (30% of $2.5M) This can come from:
- Cash
- Equity in other property
- Presales reducing risk (lower equity needed)
Development Finance Requirements
Borrower Requirements:
- Development experience: Track record (or experienced builder partner)
- Equity: 20-40% of GDV in cash/property
- Good credit: Some defaults OK with private lenders, but major issues problematic
- Clear plan: Detailed development feasibility
- Exit strategy: Pre-sales or take-out finance arranged
Project Requirements:
- Feasibility study: Detailed costs and profit projection
- Planning approvals: DA approved or strong likelihood
- Building quotes: Fixed-price builder contracts preferred
- Valuation: Independent valuation of GDV
- Pre-sales (sometimes): 30-70% pre-sold (varies by lender/project risk)
Documentation Needed:
- Development feasibility (spreadsheet)
- Plans and DA approval
- Builder contract and qualifications
- Quantity surveyor report
- Engineer reports
- Property valuations (current and "as if complete")
- Sales evidence for GDV
- Your financial position (assets, liabilities, income)
- Project timeline
Development Finance Structure
Progressive Drawdown System:
Most development finance releases funds in stages as work progresses, not all upfront.
Example: $1.75M Development Loan
Drawdown 1 - Land Purchase (30%)
- Amount: $525,000
- Use: Purchase land, legals, stamp duty
- Trigger: Unconditional contract
Drawdown 2 - Site Works (10%)
- Amount: $175,000
- Use: Demolition, site preparation, services
- Trigger: Works commenced, quantity surveyor inspection
Drawdown 3 - Base Building (20%)
- Amount: $350,000
- Use: Footings, frame, roof
- Trigger: Base stage complete, QS inspection
Drawdown 4 - Lock-up (20%)
- Amount: $350,000
- Use: Windows, doors, cladding, services rough-in
- Trigger: Lock-up stage complete
Drawdown 5 - Completion (20%)
- Amount: $350,000
- Use: Fit-out, finishes, landscaping
- Trigger: Practical completion
Total: $1.75M released progressively over 12-18 months
Interest: Capitalized (added to loan) or paid monthly
Costs of Development Finance
Example: $1.75M Loan, 18 months
Setup Costs:
- Application/establishment fee: 1-2% = $17,500-$35,000
- Valuation: $2,000-$5,000
- Legal fees: $3,000-$8,000
- Quantity surveyor: $2,000-$5,000
- Total upfront: ~$25,000-$50,000
Interest Costs (10% p.a., capitalized):
- Average loan balance: ~$875,000 (50% of peak)
- Annual interest: $87,500
- 18 months interest: ~$131,250
Line Fees/Unused Funds: Some lenders charge 1-2% p.a. on undrawn approved funds.
Exit Fees: Sometimes 1% on early repayment within first 12 months.
Total Financing Cost: $155,000-$180,000 for 18-month project
Bank vs Private Lender for Development
Major Banks (ANZ, CBA, NAB, Westpac)
Pros:
- Lower rates (7-9% p.a.)
- Larger projects ($5M+)
- Established processes
Cons:
- Require significant experience
- Strict presale requirements (often 70%+)
- Slow approvals (8-12 weeks)
- Conservative valuations
- Stringent covenants
Best for: Experienced developers, large presale campaigns, patient timelines
Private Lenders
Pros:
- Accept first-time developers (with good plan)
- Lower/no presale requirements
- Fast approvals (2-4 weeks)
- Flexible on project changes
- Higher LVRs possible
Cons:
- Higher rates (10-15% p.a.)
- More fees (2-3% establishment)
- Typically smaller projects ($500K-$5M)
- May require more equity
Best for: First project, time-sensitive, unique projects, no presales yet
Development Feasibility: The Numbers
Before applying for finance, complete detailed feasibility:
Example: 4-Lot Subdivision
COSTS
- Land purchase: $800,000
- Stamp duty + legals: $45,000
- Demolition: $25,000
- Civil works (roads, services): $180,000
- Surveying/engineering: $40,000
- Council/water/power fees: $60,000
- Landscaping: $40,000
- Marketing/sales: $30,000
- Finance costs: $100,000
- Contingency (10%): $130,000 Total costs: $1,450,000
REVENUE
- 4 lots @ $450,000 each = $1,800,000
PROFIT
- Gross profit: $350,000
- Profit margin: 19.4%
- Return on invested equity (18 months): 48% p.a.
Risk Assessment: Margin >15% usually acceptable for subdivision
Common Development Finance Mistakes
1. Underestimating Costs Always add 10-15% contingency. Construction delays and variations are common.
2. Overestimating Sale Prices (GDV) Use conservative comparable sales. Don't assume market growth.
3. Ignoring Holding Costs If sales are slow, you're paying interest monthly. Budget for 6-12 months extra holding.
4. No Presales Even if lender doesn't require them, presales de-risk your project significantly.
5. Unrealistic Timelines Council approvals, weather delays, contractor delays - add 30-50% buffer to timeline.
6. Wrong Finance Structure Match loan term to project timeline. Too short = refinance scramble. Too long = unnecessary interest.
Step-by-Step Development Finance Process
Month 1-2: Find Site & Prepare Feasibility
- Identify development opportunity
- Run initial numbers
- Engage town planner for DA likelihood
- Prepare detailed feasibility
Month 3-4: Secure Finance Pre-Approval
- Approach lenders with feasibility
- Get indicative approval/Letter of Offer
- Understand conditions (presales, approvals, etc.)
Month 4-6: Purchase Land
- Make offer subject to finance & DA
- Formal finance application
- Land valuation
- Finance approval
- Settlement
Month 6-12: Obtain Development Approval
- Lodge DA with council
- Respond to submissions
- DA approved
- Trigger development finance full approval
Month 12-13: Pre-Construction
- Engage builder (fixed price contract preferred)
- Finalize working drawings
- Obtain construction certificate
- Lender reviews builder contract
Month 13-24: Construction
- Works commence
- Progressive drawdowns as stages complete
- QS inspections trigger payments
- Deal with variations (keep within budget!)
Month 24-30: Completion & Sales
- Practical completion
- Occupation certificates
- Marketing and sales
- Settlements
- Repay development loan
- Take profit!
Total Timeline: 24-36 months for typical subdivision/townhouse project
Pre-Sales: How Many Do You Need?
Bank Requirements:
- Large developments (10+ units): 70%+ presold
- Medium (4-10 units): 40-60% presold
- Small (2-3 townhouses): 20-40% presold
Private Lender Requirements:
- Often no presales required
- Presales improve rates and LVR
- 30% presales can unlock bank rates
Presale Benefits:
- Reduces lender risk = better rates
- Locks in profit before construction
- Funds deposits can help cash flow
- De-risks market downturn
Presale Challenges:
- Selling off-plan harder than completed
- Lock in price early (miss upside if market rises)
- Sunset clauses - buyers can exit if delayed
Exit Strategies for Development Finance
Option 1: Sell All Lots/Units
- Most common
- Repay loan from sales proceeds
- Take profit
- Project complete
Option 2: Retain & Refinance
- Keep 1-2 units as investments
- Refinance to standard investment loan
- Use rental income for holding
- Long-term capital growth
Option 3: Staged Sales
- Sell most, keep 1-2
- Use sales proceeds to pay down majority of loan
- Refinance balance on retained units
Option 4: Sell to Investor/Developer
- If market softens or sales slow
- Sell entire project as one line
- Accept lower margin to exit quickly
Lenders want to see clear exit before approval.
Real Development Examples
Example 1: First-Timer Subdivision Success
Developer: Sarah, accountant, no development experience Project: 800m² house, subdivide into 3 townhouses Location: Melbourne outer suburb
Numbers:
- Land purchase: $600,000
- Construction (3x2bed townhouses): $900,000
- Costs/fees/finance: $200,000
- Total cost: $1,700,000
Funding:
- Private lender: 70% LVR on GDV ($2.1M) = $1,470,000
- Sarah's equity: $230,000 (from existing property)
- Presales: 1 of 3 sold off-plan ($700,000)
Outcome:
- 18 months later: All sold
- Sale 1: $700,000 (presale)
- Sale 2: $720,000
- Sale 3: $730,000
- Total: $2,150,000
Profit: $450,000 over 18 months = 30% ROI p.a.
Key: Strong feasibility, experienced builder partner, private lender flexibility
Example 2: Experienced Developer - Apartments
Developer: Mike, 5 previous projects Project: 12-unit apartment building Location: Brisbane inner ring
Numbers:
- Land: $1.8M
- Construction: $4.2M
- Total costs: $6.5M
- GDV: $9.6M (12 units avg $800k)
Funding:
- Bank senior debt: 65% GDV = $6.24M
- Mike's equity: $260k cash + cross-collateralized properties
- Presales: 8 of 12 (66%)
Outcome:
- 24 months: All sold
- Average sale: $820k (market improved)
- Total sales: $9.84M
- Profit: $3.34M
After tax (~30%): $2.3M profit over 2 years
Key: Experience got bank rates, presales critical, market timing lucky
When Development Finance Gets Declined
Common Reasons:
1. Insufficient Experience
- Solution: Partner with experienced builder or developer
- Solution: Start with smaller project
- Solution: Use private lender (more flexible)
2. Poor Feasibility
- Solution: Improve margin (reduce costs or increase GDV)
- Solution: Get more accurate quotes
- Solution: Add presales to de-risk
3. Lack of Equity
- Solution: Find JV equity partner
- Solution: Use mezzanine finance
- Solution: Do smaller project first
4. No Approvals
- Solution: Make land purchase subject to DA approval
- Solution: Get town planner letter confirming strong likelihood
- Solution: Wait for DA then reapply
5. Market Concerns
- Solution: Add presales to prove demand
- Solution: Target growing suburbs with strong fundamentals
- Solution: Reduce project size
Tax Implications
Development Profits:
- If you're a developer (doing multiple projects), profits = ordinary income taxed at marginal rate (up to 47%)
- If first project, may be capital gains taxed at 50% discount (if held 12+ months, but rare in development)
- Most development profit = ordinary income, no CGT discount
GST:
- Developments are usually GST-registered
- Claim GST credits on costs
- Charge GST on sales
- Creates cash flow benefits during construction
Land Tax:
- Development sites may be exempt from land tax during construction
- Check state rules
Recommendation: Engage tax accountant early to structure correctly (trust, company, personal).
Your Next Steps
- Find a development opportunity: Land with upside
- Run feasibility numbers: Be conservative
- Engage town planner: Assess DA likelihood
- Prepare funding proposal: Detailed feasibility + plans
- Connect with development finance lenders: Get pre-approval
Frequently Asked Questions
Can I get development finance with no experience? Yes, especially with private lenders. Having an experienced builder partner significantly helps.
How long does development finance take to approve? Banks: 6-12 weeks. Private: 2-4 weeks. Pre-approvals are faster than full approvals.
What if my project runs over budget? Most loans have 5-10% cost overrun buffer. Beyond that, you'll need to inject more equity or secure additional mezzanine finance.
Can I live in one of the dwellings during construction? Generally no - development finance requires clear commercial intent. Owner-occupied purchasers are treated differently by lenders.
What if sales are slower than expected? Budget for extended holding costs. Most lenders allow 6-12 month extension with additional interest. Worst case: reduce prices to sell.
Do I need an Australian Credit License to develop? No, not for your own projects. ACL is for lending/credit activities, not property development.
Land development is higher risk than standard property investment, but with proper planning, experienced partners, and the right finance, it offers exceptional returns.
Ready to fund your development? Connect with development finance specialists for expert assessment of your project.