# Land Development Finance: Complete Guide to Funding Your Property Development
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:**
1. **Land acquisition**: Purchasing the development site
2. **Planning/approvals**: DA, engineering, council approvals
3. **Construction**: Civil works, building, infrastructure
4. **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:
1. **Development experience**: Track record (or experienced builder partner)
2. **Equity**: 20-40% of GDV in cash/property
3. **Good credit**: Some defaults OK with private lenders, but major issues problematic
4. **Clear plan**: Detailed development feasibility
5. **Exit strategy**: Pre-sales or take-out finance arranged
### Project Requirements:
1. **Feasibility study**: Detailed costs and profit projection
2. **Planning approvals**: DA approved or strong likelihood
3. **Building quotes**: Fixed-price builder contracts preferred
4. **Valuation**: Independent valuation of GDV
5. **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:**
1. Reduces lender risk = better rates
2. Locks in profit before construction
3. Funds deposits can help cash flow
4. 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
1. **Find a development opportunity**: Land with upside
2. **Run feasibility numbers**: Be conservative
3. **Engage town planner**: Assess DA likelihood
4. **Prepare funding proposal**: Detailed feasibility + plans
5. **[Connect with development finance lenders](/connect)**: 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](/connect) for expert assessment of your project.