How Commercial Construction Loans Work in Australia
Construction Finance
Staged drawdowns · On completion valuation · Practical completion
A commercial construction loan is not a bigger home loan and it is not development finance. It is a staged facility that has to survive valuation, cost-to-complete testing, progress claims and an exit at practical completion. This guide follows the borrower from before the building contract is signed through first draw, cost overruns, completion and refinance.
Quick Answer
A commercial construction loan funds commercial premises through staged drawdowns as work is verified. For an owner-occupier, the lender focuses mainly on the business that must service the finished debt. For a build-to-lease project, tenant commitment, completed value and the exit matter as well. A project being built to sell is normally development finance, not this product.
Also called: commercial construction finance, business construction loan, commercial building loan, owner-occupier construction finance.
How does a commercial construction loan work?
A commercial construction loan is released in stages against certified building progress, not paid out in full at settlement, and interest is charged only on the balance actually drawn. Each stage is released after a quantity surveyor or the lender's own valuer inspects the site and confirms that the work being claimed has genuinely been completed.
The distinction that decides almost everything else is what repays the debt after construction. For an owner-occupier, the lender reads the trading business, its cash flow and its ability to service the finished debt. For a build-to-lease project, the lender also reads the tenant commitment, lease income, completed investment value and exit. A project built to sell is different again: that is normally development finance, where feasibility, gross realisation value and sell-down matter more than the operating business.
Where are you in the process, and what should happen next?
Commercial construction finance is easier to understand as a sequence of gates than as one approval. The question you should ask changes as the project moves, and solving the next gate early is usually cheaper than fixing it after a draw has stopped.
| Where you are now | The question that matters next | What should exist before you move on |
|---|---|---|
| Comparing finance before signing anything | Is this commercial construction finance, development finance, a term loan or a fitout facility? | A clear use case, proposed ownership structure, site and realistic build budget |
| Plans and tender are ready, contract not yet signed | Can the lender assess this structure before the contract becomes unconditional? | Near-final contract, plans, approvals, builder details, financials and a finance/legal strategy for the contract |
| Credit is approved but first draw has not happened | Which condition precedent is still blocking the first advance? | Executed documents, registered security, required insurance, lender cost report and the agreed equity contribution |
| The builder has lodged a progress claim | What amount will the lender actually certify and release? | Completed work that matches the claim, a passing cost-to-complete test and no unapproved variation hidden in the number |
| The build is over budget or behind program | Is there still enough undrawn money and time to finish? | Revised budget, revised program and a documented plan for the funding or timing gap |
| Practical completion is approaching | Will the term facility or refinance be large enough to clear the construction balance? | Current financials, expected as-complete value, final debt estimate and a tested exit |
| The original lender no longer fits | Can another lender take over an incomplete build or the completed debt? | Current payout, fresh cost-to-complete position, builder status, security position and enough time to refinance |
Is this actually the product you need?
A large share of people who search for a commercial construction loan do not need one, because the phrase is used loosely to cover five different jobs. Sorting this out first is worth more than anything else on this page, because the wrong product is the most expensive mistake available at this stage and it is almost always made before anyone speaks to a lender.
| What you are actually doing | What it is usually funded by | What the lender assesses |
|---|---|---|
| Building commercial premises your own business will trade from | A commercial construction loan, converting to or refinancing into a term facility | Your trading business, its cash flow, and whether it services the finished debt once the rent you pay elsewhere disappears |
| Building commercial premises to hold and lease to a tenant | A commercial construction loan, with pre-commitment tested | The borrowing entity plus the strength and bindingness of the agreement for lease behind the income |
| Building to sell down, in whole or in lots | Development finance | Project feasibility, gross realisation value, and pre-sale or pre-commitment cover |
| Fitting out, refurbishing or extending premises you already occupy | Commonly a term facility, a limit increase against existing security, or fitout and equipment finance, and only a construction facility where the works are structural enough to need staged certification | The existing security position and your serviceability, rather than a building that does not yet exist |
| Running a construction business and needing cash flow or plant | Not this product at all: working capital or equipment finance | Trading performance, contract pipeline and the asset being funded, with no property build involved |
| Building dwellings, whether one or several | Residential construction or residential development finance, outside the scope of this guide | A different regulatory perimeter and a different set of pre-sale rules |
If your row is one of the last three, the rest of this page will not be the answer to your question. The construction finance hub routes the other cases.
How the money is actually released
Money is released against certified progress and never in advance of it, which is why a construction facility feels slower than a term loan to a borrower used to settlement day. The sequence below is the general shape on a commercial build. The mechanics of progress claims are covered in more depth elsewhere on this site, starting with the construction finance entry.
| Stage | What triggers the release | Who signs it off | What you are charged interest on |
|---|---|---|---|
| Establishment or land advance | Settlement of the site, or refinance of the debt already sitting against land you hold, with the lender taking a first registered mortgage | The lender and its solicitor | The amount advanced at that point, and nothing more |
| Your equity contribution | Commonly required to go into the project before or alongside the first construction draw, rather than at the end | The lender, as a condition precedent to first drawdown | Nothing. It is your money, not borrowed money |
| Progress claims through the build | The builder claims for work completed, and an inspection confirms the work claimed has actually been done on site | A quantity surveyor or the lender's panel valuer, not the builder and not you | The cumulative balance drawn to date, which climbs every claim |
| The cost to complete test | Applied at every claim: the lender checks that what remains undrawn is still enough to finish the building | The quantity surveyor, reporting to the lender | Not a drawdown. It is the test that decides whether the next one happens |
| Final claim | Practical completion sign-off and the occupancy or building certificate from the relevant authority | The builder, the superintendent where one is appointed, and the certifying authority | The full balance, which is now the debt the term facility has to clear |
The cost to complete test is the row worth reading twice. Most borrowers assume the only question at each claim is whether the work was done. The second question is whether the money left in the facility still finishes the building, and it is the one that stops draws when variations, provisional sums or a failed contractor have quietly pushed the finish line past the limit. It is also why a fixed-price contract carrying large provisional sums makes a lender nervous: it is a variable-price contract wearing a fixed-price label, and the test is applied to the real number.
What if the builder claims more than the lender will release?
A builder's contractual right to claim and a lender's obligation to fund are two different things. The lender advances only the amount it is prepared to certify under the facility. If the quantity surveyor certifies less than the builder claims, the borrower can still owe the builder under the construction contract while having a smaller lender draw available to pay it.
The same funding gap can appear where a claim includes an unapproved variation, a provisional sum has moved, the claim schedule is ahead of the value of work physically in place, or the QS concludes that the undrawn facility is no longer enough to complete the project. In that last case the lender may require extra borrower equity before another draw so the facility is brought back into balance against the verified cost to complete.
| Why the numbers differ | What the lender is likely to do | What has to be resolved |
|---|---|---|
| QS values less work in place than the builder claims | Fund the certified value rather than the invoice amount | Whether the claim is early, the certification is wrong, or the borrower must fund the timing gap |
| Unapproved variation | Exclude it from the draw until the lender accepts the revised cost and structure | Who funds the variation and whether the facility still has enough money to finish |
| Provisional sum or construction cost has increased | Re-test the remaining budget and cost to complete | Additional equity, a facility increase if approved, a scope change or another funding source |
| Payment schedule is front-loaded | Continue funding against verified value rather than the builder's contractual timing | The cash mismatch between the construction contract and loan draw cycle |
| Facility is no longer sufficient to complete | Stop or condition further draws until the funding gap is cured | A fully funded revised cost-to-complete position before work proceeds safely |
Deal with the discrepancy before the builder's payment deadline. Reconcile the builder claim against the QS certification, identify whether the issue is timing, scope or a genuine cost overrun, then establish who funds the difference. If the project has developed a real completion shortfall, see what happens when a construction project runs out of money mid-build. For the ordinary draw process, see commercial build progress drawdown timing.
| What you are comparing | Commercial construction loan | Development finance |
|---|---|---|
| What it funds | Premises the borrower intends to occupy, or to hold and lease, once built | A project built to be sold down, in whole or in lots |
| What costs it covers | Land where applicable, the building contract sum, and the professional fees and interest the lender agrees to include | Total development cost across acquisition, construction, consultants, holding costs and a contingency |
| What it is assessed on | The borrowing business, its cash flow and its serviceability of the finished debt | Project feasibility, gross realisation value and pre-sale or pre-commitment cover |
| How it is repaid | From business cash flow or rent, over a term, after the facility converts or is refinanced | From sale proceeds as the completed stock settles |
This comparison is treated in full, from the builder's side, in commercial property loan versus development finance. The table above is the boundary only.
It is worth knowing what the market around your build is doing, because it moves lender appetite. The value of total non-residential building approvals fell 24.7 per cent to 8.26 billion dollars in June 2026 in seasonally adjusted terms, according to the Australian Bureau of Statistics Building Approvals series released on 30 July 2026. Work actually being done moved the other way: non-residential building work done rose 2.2 per cent to 17.7 billion dollars in the March quarter of 2026 in seasonally adjusted chain volume terms, and 11.4 per cent year on year, per the Australian Bureau of Statistics Building Activity series released on 8 July 2026. Approvals are a forward signal and work done is a backward one, so the two diverging is normal rather than contradictory. Both are national, seasonally adjusted series covering all non-residential building, not a guide to what any individual lender will do on your file.
Lender appetite is also shaped by how the loan is capitalised. Under APRA's Prudential Standard APS 112 (instrument F2025L00652, determined 13 April 2025, commenced 1 July 2025), where repayment depends primarily on the cash flows generated by the property, an authorised deposit-taking institution applies risk weights of 70 per cent up to a loan to value ratio of 60, 90 per cent between 60 and 80, and 110 per cent above 80, with a flat 150 per cent for exposures classified as non-standard. An owner-occupier is a different case entirely. Where the exposure is to an unrated small or medium enterprise rather than to the property's cash flows, Table 12 of the same standard applies a single 85 per cent risk weight. That is a materially cheaper use of a bank's capital, and it is a large part of why an owner-occupier building their own premises is often a more comfortable conversation than an investor building to lease. These are prudential capital rules that apply to banks as at 1 July 2025, not a rate or an approval outcome for a borrower.
For scale, authorised deposit-taking institutions held 487.6 billion dollars of commercial property exposures as at the March 2026 quarter, up 8.7 per cent year on year, per APRA's Quarterly ADI property exposures statistics published 29 June 2026. That is total commercial property exposure across the regulated banking system as at that quarter, not construction lending alone, and it says nothing about any individual lender's appetite for your build.
If you want the wider assessment framework before the construction question, how commercial property loans work is the parent guide to this one.
What does a lender need before it will look at your build?
A lender can start a commercial construction conversation before every document is final, but meaningful credit assessment needs a clear proposed contract, security and entity structure, site and approval position, and current financial evidence. Final approval and first draw then depend on the lender's conditions precedent being satisfied. Plans and renders help describe the build; they do not replace the evidence the credit decision runs on.
| What the lender asks for | Why it is asked for | What makes it fail |
|---|---|---|
| A signed fixed-price building contract | It sets the number every other number on the file is measured against | Large provisional sums, a cost-plus arrangement, or an unsigned draft that can still move |
| The builder's licence, insurances and financial capacity | The lender is taking delivery risk on your builder alongside you | A builder without the balance sheet or track record to carry a contract of that size |
| Plans, specification and planning or development consent | It confirms what is being valued, and that it can lawfully be built | Consent conditions still unsatisfied, or plans that no longer match the contract |
| A quantity surveyor's initial cost report | An independent check that the contract sum actually builds the building, and the baseline for the cost to complete test | Absent, or prepared for the builder rather than instructed for the lender |
| Current financials and tax position for the borrowing entity | Serviceability of the finished debt, not of the construction balance | Returns more than a year old, an unlodged position, or an arrangement with the tax office that has not been disclosed |
| Title search for the site, held in the borrowing entity | The lender needs a first registered mortgage before the first drawdown | Caveats, unregistered dealings, vendor terms, or land sitting in a different entity from the borrower |
| Contract works and public liability insurance | It protects the security while the security is a building site | Policies that do not note the lender's interest, or cover that lapses before practical completion |
| The agreement for lease, where you are building to lease | It is the income the facility is underwritten on | A heads of agreement or letter of intent presented as a commitment, or conditions the tenant controls |
Can you get finance approval before the building contract is signed?
Sometimes, but the word approved is not enough on its own. A lender may be comfortable with the borrower and proposed build while the facility is still conditional on the final contract, valuation, quantity surveyor report, security documents, insurance and other conditions. Do not make a commercial building contract unconditional merely because you have an indicative or conditional finance approval.
If the building contract or land contract has a finance condition, deposit deadline, long-stop date, termination right or variation mechanism, have a commercial solicitor read it in the context of the proposed facility. Do not assume a residential-style finance clause or residential construction timeline applies to a commercial build.
| Status | What it usually tells you | What it does not tell you |
|---|---|---|
| Indicative terms or lender appetite | The proposed borrower, security and broad structure may fit a lender's appetite based on information supplied so far | That credit has approved the file, the valuation works, or the lender is obliged to advance money |
| Conditional approval | Credit is prepared to proceed if stated information and conditions are satisfied | That the final building contract, QS report, valuation, builder, security and draw conditions have all passed |
| Formal facility approval and executed documents | The facility has moved from proposal into documented credit, subject to the conditions written into the facility | That the first construction advance is available today |
| Ready for first draw | The lender is satisfied that the conditions required before the first advance have been met | That later progress claims will be funded automatically without further certification |
Why can a formally approved commercial construction loan still be unable to reach first draw?
Because approval and drawdown are different gates. A formally documented facility can still sit undrawn until every condition precedent required for the first advance is satisfied. Depending on the lender and project, that can include the executed building contract, lender valuation, initial QS report, registered security, borrower equity, approvals, insurance, builder approval and a builder direct deed or tripartite agreement where the lender requires one.
| First-draw gate | What the lender is trying to confirm | What can stop the draw |
|---|---|---|
| Executed building contract | The final scope, price, payment schedule and variation mechanism match the approved transaction | A contract that changed after approval, large unresolved provisional sums, or a payment schedule the lender cannot fund as written |
| Initial quantity surveyor report | The approved budget can deliver the plans and the remaining facility is adequate to complete the works | Unsupported costs, inadequate contingency, incomplete documents or a budget the QS does not accept |
| Valuation | The security value used to size the facility still supports the approved limit | A lower value or a valuation basis materially different from the assumptions used at credit approval |
| Mortgage and other security | The lender has the agreed security position before advancing construction money | An existing mortgage not discharged, caveat, unresolved priority issue or security document not yet registered or effective |
| Borrower equity | The borrower has contributed the equity the facility requires before lender money goes in | Equity not yet contributed, or costs already paid not recognised in the way the borrower expected |
| Approvals and insurance | The works can lawfully proceed and the lender's security is insured during construction | Missing permits, approval conditions still open, expired cover or policies that do not meet the facility requirements |
| Builder approval and direct agreement | The builder can deliver the contract and the lender has any agreed step-in or notice rights | Builder due diligence not cleared, or a required side deed or tripartite agreement still being negotiated |
Conditions precedent commonly cover the executed building contract, the insurance position, the lender-appointed quantity surveyor's report, lender approval of the builder, and any side deed or tripartite agreement the lender requires. None of that is a rule you can look up: the only conditions that bind you are the ones written into your own facility and project documents, so read the conditions precedent schedule rather than a general list.
What should you check in the facility before you sign?
The approval amount is only one part of the deal. The terms that create problems later are usually the ones governing time, cost overruns, variations, security and the exit.
| Term | Question to ask before signing | Why it matters later |
|---|---|---|
| Latest completion date and facility expiry | Are these the same date, and what is required for an extension? | The debt can become repayable even while the building is unfinished |
| Construction-to-term conversion | Is a term facility actually committed, and what conditions must be met? | A conversion clause may promise a process or product without guaranteeing the final limit you need |
| Interest during construction | Is interest capitalised, serviced monthly, or partly both? | It changes cash burn during construction and the debt that must be cleared at completion |
| Cost overruns and variations | Who funds an overrun and when does a variation need lender consent? | A variation can be contractually valid and still be outside the approved facility |
| Security and guarantees | Which property, entity, guarantee or business security is being taken? | Extra security can affect a later refinance, sale, restructure or release request |
| Reporting and covenants | What must be reported during the build, and what triggers a review? | Delay, builder trouble, tenant changes or financial deterioration can trigger a credit decision before a payment is missed |
| Default, stop-draw and enforcement clauses | What lets the lender stop funding, accelerate the debt or require a cure? | Commercial borrowers should not assume the consumer-credit enforcement process sits underneath the documents |
The order to settle things in
Sequence matters more than speed here, because several of these items are expensive to redo. Settle which entity is borrowing and which entity holds the land first, since a valuation addressed to the wrong entity is wasted and a land transfer can carry duty. Settle the contract next, because the cost report and the valuation both work off it. Settle the interest position after that, meaning whether interest during construction capitalises or is serviced in cash, because it changes what you can afford before it changes anything else. Only then order the valuation. Deals that run smoothly are the ones where those four were resolved before anybody ordered a number.
What sets the timeline, and which gate is actually holding you up
A commercial construction loan takes as long as its slowest gate, and this guide prints no timeframes because the gates are controlled by different parties and most of them are not your lender. Knowing which gate you are sitting at is more useful than any average, because the remedy is different at each one.
| Gate | What has to happen | Who controls it | What makes it slow |
|---|---|---|---|
| Credit assessment | The lender assesses the borrowing business against the debt it will carry once the building is finished | The lender | Financials out of date, an undisclosed tax position, or an entity structure still being settled |
| Valuation | The lender instructs its own panel, on a basis the lender chooses | The lender and its valuation panel | A specialised asset with thin comparable evidence, or plans that no longer match the contract |
| Quantity surveyor's initial cost report | Independent pricing of the contract sum against the drawings | An independent consultant instructed by the lender | Incomplete drawings, or provisional sums that cannot be priced yet |
| Documentation and security | Mortgage prepared and registered, conditions precedent satisfied | Solicitors and the land titles office | Caveats, land sitting in the wrong entity, or an existing mortgage still to discharge |
| First drawdown | Every condition precedent met and your equity contributed | You | Insurance that does not note the lender's interest, or equity not yet in the project |
| Each progress claim | Work inspected, the claim certified, and the cost to complete re-tested | The inspecting quantity surveyor or panel valuer | Claims lodged before the work claimed is genuinely finished |
| Practical completion and the certificate | Builder sign-off, then the occupancy or building certificate from the authority | The certifier and the relevant authority | A queue nobody on your file controls. This is the gate that most often runs past a facility expiry date |
General information only. This table names the gates and what delays them, and deliberately carries no timeframes, because a duration quoted without your file behind it would be wrong for most readers.
What is the loan limit actually measured against?
Lenders on a commercial build commonly size the limit to the lower of total development cost and the on-completion valuation, which means the headline ratio you were quoted tells you very little on its own until you know which number it is a ratio of. This is the single most confused point in the public material on commercial construction lending, and it is confused in a way that costs borrowers real money, because two lenders quoting an identical percentage can require materially different amounts of cash from you.
There are four candidate bases in circulation, and they are not interchangeable.
| Measurement base | What it includes | What it does to your limit |
|---|---|---|
| Land value | The site alone, at the value the lender accepts | The narrowest base and the smallest number, because it ignores everything the money is actually being spent on. Used to size what can be advanced against the land before a brick is laid |
| Hard construction cost | The building contract sum, and nothing else | Makes a ratio look generous and is misleading, because it excludes the professional fees, authority charges and interest you still have to fund. Ask what is inside the number before you compare it to anything |
| Total development cost | Land, hard construction cost, professional and consultant fees, authority and connection charges, and the interest expected to accrue during construction | The honest measure of what the project costs to deliver, and the ratio most closely related to the cash you actually need to find |
| On-completion valuation | What the finished asset is assessed to be worth, on the lender's own valuation panel, on the lender's instruction | Where the completed value sits below cost, this base binds and the limit falls, which is exactly when a borrower discovers the equity requirement has moved |
General information only. The bases above describe how limits are commonly measured, not a limit any lender will offer. Not financial advice; consider your own circumstances and speak to a broker.
The phrase to listen for is "the lower of". When a lender sizes to the lower of cost and completed value, the binding constraint moves depending on the deal. On a build where the finished asset is worth comfortably more than it costs to deliver, cost binds and your equity is a share of cost. On a specialised or purpose-built asset, the completed value can easily land below total development cost, at which point the valuation binds and your equity requirement rises even though the quoted percentage never changed. Nothing about the headline ratio told you which world you were in.
Two practical consequences follow. The first is that the loan to value ratio you are quoted is only meaningful alongside its base, and you should ask for both in writing at term sheet stage rather than at drawdown. The second is that you do not choose the valuer. The on-completion valuation is instructed by the lender, from the lender's panel, and it is the lender's instructions that define the basis of assessment. A valuation you commission yourself is useful for your own planning and is generally not the number the credit decision runs on. The quantity surveyor sits alongside this, verifying that costs claimed match work done, which is a different job from assessing what the finished asset is worth.
Where a lender does stretch the ratio, it is doing so against one of these four bases and usually with conditions attached elsewhere in the structure. What an 80 per cent loan to value ratio actually requires on commercial property deals with the stretch case in the purchase frame, and the same logic on base and conditions applies on a build.
How much cash do you actually need up front?
There is no single deposit figure on a commercial build, because the cash you need is set by which of several cases you are in, what the lender accepts as equity, and whether interest during construction is capitalised or serviced. Anyone quoting you one number without asking those three questions is guessing. What you can do is work the number out yourself, in five steps, and arrive at a lender conversation already knowing what the answer has to be.
| Step | What you do | What people get wrong here |
|---|---|---|
| 1. Build total development cost | Land at current value, the contract sum, provisional sums and a contingency, consultant and authority fees, and the interest expected to accrue during the build | Starting from the contract sum alone, which understates the project by every line that is not the builder's |
| 2. Ask what the on-completion valuation will be assessed on | Ask the lender which basis its panel will be instructed on, and whether the asset will be treated as specialised security | Assuming the valuation reflects what the finished operation is worth to them, rather than what the empty building is worth to somebody else |
| 3. Take the lower of the two | Whichever of total development cost and completed value is smaller is the measurement base the limit is sized against | Applying the ratio to whichever number is larger, which is the single most common budgeting error on a build |
| 4. Apply the ratio to that base, not to the contract sum | The gap between the base and the limit is the equity the project needs from you | Comparing two lenders' percentages without checking that both are percentages of the same thing |
| 5. Add what the facility will not fund | Duty on any land transfer, goods and services tax timing, loose plant and fitout, and interest during construction if it is serviced in cash rather than capitalised. Then set the total against your cash plus usable equity | Treating the equity number as the cash number. They are rarely the same, and the difference lands in your working capital |
General information only. This is a method for deriving your own number, not an indication of any lender's ratio, requirement or approval. Not financial advice; consider your own circumstances and speak to a broker.
Where the build cost number in step one should come from
The cost figure should come from a signed contract and an independent cost report, not from a rate per square metre. Per-square-metre figures circulate widely in online cost guides and they are national averages assembled from a mix of projects, useful for a feasibility sketch and not a number any lender will fund against. What a lender works from is the contract sum, tested by a quantity surveyor pricing the actual drawings on the actual site.
Three things move a real cost away from any published average, and all three are specific to your site. What the ground does, meaning soil, fall, rock, contamination and where the services run. What the authority attaches as a condition of consent. And what the specification carries in provisional sums, which are the parts of the contract nobody has priced yet. A contract carrying large provisional sums has no reliable cost figure at all until those sums are resolved, which is the same reason it makes a lender uncomfortable and the same reason the cost to complete test bites later.
| Case | What it looks like | What sets the equity requirement |
|---|---|---|
| The standard commercial build | A generic warehouse, office or industrial unit with a broad resale market and a conventional fixed-price contract | The lower of cost and completed value in the ordinary way. This is the baseline case |
| The specialised asset | A purpose-built asset with a narrow resale market and a valuation that separates business value from bricks and mortar | Sits above the baseline, for structural resale reasons rather than punitive ones. Covered in full further down this page |
| The strong owner-occupier | A long trading history, clean financials, and a business that services the finished debt from its own cash flow without relying on tenant income | The most comfortable of the three, and the case where lender competition is most likely to work in your favour |
| What counts as equity in all three | Cash contributed to the project, equity in land the borrower already holds, and security over other property owned by the borrower or a related party | The third of these reduces the cash you write a cheque for and increases what you have at risk, which is a trade rather than a saving |
The question almost nobody asks: does interest capitalise, or do you pay it monthly?
This single term can decide whether a business already paying rent somewhere else can carry the build. Where interest during construction is capitalised, the interest component is added to the facility instead of being paid monthly, but the business may still have rent, fees, tax, variations and other project costs to fund. Where interest is serviced in cash, you also pay interest on the drawn balance as it rises through the build. The term therefore changes both monthly cash burn and the debt that has to be cleared at completion.
Both structures are ordinary and lenders differ on which they will offer. Capitalising is not free: the interest is still charged, it just lands in the facility, which makes the debt at practical completion larger and feeds directly into the conversion problem set out further down this page. Servicing in cash keeps the finished debt smaller and demands more of you during the build. Neither is automatically the right answer, and the choice belongs in the term sheet conversation rather than being discovered at first drawdown.
Be careful what you compare this against. Most Australian material explaining interest during construction is written about residential building loans, where the draw sequence is standardised across lenders and the borrower is a natural person. On a commercial facility the sequence follows your own building contract, and whether interest capitalises is negotiated on the term sheet rather than set by the product.
What actually moves your margin
Pricing on commercial construction is not a single published band and this guide deliberately does not print one, because a number without your file behind it is noise. Structurally, the margin moves with lender type, since major banks, second-tier lenders and specialist funders price the same risk differently. It moves with pre-lease strength, because committed tenant income de-risks the finished asset. It moves with how specialised the completed asset is, for the resale reasons covered further down. And it moves with whether interest capitalises, because a capitalising facility carries a larger balance for longer. For the deposit question in the purchase frame see commercial property loan deposits, and for how lenders tier owner-occupiers see owner-occupier equity tiers.
Does land you already own count as your deposit?
Yes. Equity in land you already own can often reduce or replace the cash contribution needed for a commercial build, but the usable amount depends on the lender's current valuation, existing debt and title interests, and the security structure. Owning valuable land does not remove the need to prove the finished debt can be serviced.
Purchase cost or current market value
Lenders generally work from the value they are prepared to accept, not simply the number you paid years ago. Where the site has appreciated, that uplift may contribute equity. Where the purchase is recent, a lender may give more weight to the arm's length purchase evidence. Establish the valuation basis before relying on paper equity to fund a contract deposit, variation or first draw.
Existing mortgages, caveats and vendor terms
An existing mortgage does not automatically stop the land being used, but the incoming construction lender usually needs a security position it accepts before advancing construction money. That can mean refinancing or discharging existing debt, obtaining required consents, or restructuring other security. Caveats, vendor finance, cross-collateralised loans and unregistered interests can make the first-draw problem more complicated than the valuation problem.
Does the land have to be in the same entity as the trading business?
Not necessarily. A property-owning company, trust or individual can hold the land while a different trading entity services the debt, provided the lender is comfortable with the mortgage, guarantees and any other security connecting the parties. Do not transfer land solely because somebody says the property and business must sit in one entity. A transfer can create duty, goods and services tax, capital gains tax and asset-protection consequences that belong with your accountant and solicitor before the finance structure is locked in.
| Starting position | What the lender may need | What to resolve before relying on the land equity |
|---|---|---|
| Property trust or company owns the land, trading business will occupy it | Mortgage from the landowner plus guarantees or other support linking the trading cash flow to the property debt | Who is borrower, guarantor and mortgagor, and how rent or occupancy is treated in serviceability |
| Land is held personally | A mortgage from the owner and, depending on structure, guarantees or support from the trading entity | Legal, tax and asset-protection consequences of using personal property as business security |
| Existing bank already has a mortgage | Refinance, discharge or an agreed ranking/consent structure before construction funding starts | Payout, release timing and whether other debts are tied to the same security |
| Loans are cross-collateralised | A wider refinance or partial release rather than a simple new construction mortgage | Which assets and liabilities must move together, and what the outgoing lender will actually release |
| Vendor terms or a caveat remain on title | Those interests resolved, postponed or otherwise dealt with to the lender's satisfaction | Whether the proposed first-ranking security can actually be registered when required |
The tax questions that belong with your accountant before they reach a lender
Three tax questions can change real cash on a commercial build, and none of them is a broking question. Put them in front of a registered tax agent before changing the ownership entity or finalising the funding structure.
| Question | Why it matters on a build specifically | Who answers it |
|---|---|---|
| Whether goods and services tax on construction costs is recoverable, and when | Construction invoices arrive throughout the project, so the tax timing can affect working capital during the build as well as the final tax position | Your accountant or registered tax agent, against your registration, reporting cycle and intended use |
| What happens if land is transferred between entities | Duty, goods and services tax and capital gains tax consequences can consume equity that was expected to fund construction | Your accountant and solicitor, using the rules in the state or territory where the land sits |
| How capital works deductions apply to the finished premises | Construction costs, commencement date, use and ownership can affect the treatment | Your accountant or registered tax agent |
General information only. Do not move property between entities just to satisfy an assumed lending rule. Finance, duty, tax and asset-protection outcomes depend on the ownership structure and jurisdiction.
Two published rules that decide what a land transfer actually costs
Where the answer is to move the land into the borrowing entity, price the duty before you commit to the transfer, because the cost is routinely underestimated and it comes out of the cash you thought you had for construction.
Two rules that decide what a land transfer costs you
| Rule | What it says | Scope, source and as-of |
|---|---|---|
| Duty is assessed on the greater of two numbers | Transfer duty is assessed on the greater of the consideration and the unencumbered market value of the property. Transferring a site into your borrowing entity at a nominal or historic figure does not produce a nominal duty bill. | The New South Wales revenue authority, Revenue NSW, ruling DUT 018, and the State Revenue Office Victoria ruling DA.037, as at 7 August 2026. These are New South Wales and Victorian rulings. Other states and territories set their own rules and you should check the revenue office for the state your land is in. |
| Victoria has replaced duty with an annual property tax | The reform commenced 1 July 2024. Duty is paid one final time on the first qualifying transaction, after which a 10 year transition runs, and the property then attracts an annual tax of one per cent of that property's unimproved land value, with no tax-free threshold. | Victorian Department of Treasury and Finance, commercial and industrial property tax reform, final design information sheet, commenced 1 July 2024. Victoria only. This rule does not apply to commercial or industrial land in any other state or territory. |
General information only. These are published revenue rules as at the dates shown, not advice on your transaction, and duty and tax outcomes depend on the state, the entity and the facts. Not financial advice; consider your own circumstances and speak to a broker, and take duty and tax advice from a qualified adviser.
If the land sits in a self-managed super fund
Self-managed super funds holding commercial premises are common among business owners, and the rules changed recently. From 10 August 2026 a limited recourse borrowing arrangement may be used to acquire real property only where the property is business real property. Arrangements entered into before that date, refinances of those arrangements, and binding contracts to acquire real property exchanged before that date are not affected, even where the contract settles or the arrangement is entered into afterwards. The amending legislation is the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, which received Royal Assent on 26 June 2026. Source: Australian Taxation Office, changes to limited recourse borrowing arrangements for property from 10 August, as read 27 August 2026. Building is a different question again from acquiring, because a limited recourse borrowing arrangement also carries long-standing restrictions on what may be done to an asset while the arrangement runs. This is a summary of published rules as at that date and not advice on your fund; superannuation borrowing is a specialist area and you should take advice from your fund's adviser. There is more on the lending side in self-managed super fund commercial property loans.
Where you are building on land you already own in order to occupy the finished premises yourself, owner-occupier finance for building your own premises covers the structure end to end.
Do you need a tenant lined up before a lender will fund?
Not always. An owner-occupier does not need an external tenant because the trading business is the repayment source. On a build-to-lease project, committed tenants can materially improve bankability, gearing and pricing, but there is no universal Australian pre-lease percentage. Specialist and non-bank structures can sometimes fund with low or no pre-leasing where the asset, equity and exit are strong enough.
Pre-commitment is the commercial analogue of pre-sales on a residential development. On a residential development the lender wants evidence that finished stock will sell. On a commercial build to lease, it wants evidence that the finished building will earn. In both cases the lender is buying certainty about the cash flow that repays it, and in both cases a document that falls short of binding is worth much less than borrowers assume.
What a lender actually wants to see inside an agreement for lease
The document that carries pre-commitment is normally an agreement for lease, signed before the building exists, committing a tenant to take a lease on completion. Very little public material explains what a lender reads inside one, so here is the list, term by term.
| Term the lender reads | What gets it accepted | What gets it rejected |
|---|---|---|
| Status of the document | Binding on both parties, with any conditions precedent limited and within the borrower's control | A heads of agreement, letter of intent or expression of interest presented as a commitment |
| Conditions precedent | Few, defined, and satisfiable by you or by the passage of time | Conditions the tenant controls, which is a walk-away right in different words |
| Lease term | Long enough to support the debt on its own, without relying on options being exercised | A short initial term with options the tenant may never take, or a term shorter than the debt it is meant to support |
| Tenant covenant | A covenant the lender can assess: trading history, financial capacity, or a parent guarantee behind it | A tenant with no assessable financial history and no guarantee, or a related-party tenant treated as though it were third-party income |
| Incentives and rent-free periods | Disclosed and quantified in the document, so the lender sees effective rent rather than face rent | Incentives buried in a side deed outside the document, so face rent overstates real income |
| Rent commencement trigger | Tied to a defined, certifiable event | Vague, or tied to an event nobody certifies |
| Delay and completion | Express provision for what happens if completion runs late | Silence, which in practice hands the tenant an argument |
| Make-good and fitout | A position that leaves capital cost where the parties intended it | Drafting that quietly transfers fitout cost back to the landlord after the facility has been sized |
When the rent actually starts
The trigger for rent commencement matters more than its length in the document suggests, because it is the moment the asset starts producing the income the lender underwrote. The Property Council of Australia has observed that the rent commencement is almost always triggered by a clause relating to practical completion. That observation dates from 4 June 2019 and is now seven years old; it describes the drafting mechanism commonly used and it says nothing about what proportion of a building any lender requires to be pre-committed. Treat it as background on how these clauses are built, not as a threshold.
On proportion, the honest answer is that there is no single published figure and the requirement moves with lender type. Major banks, second-tier lenders and specialist funders each take a different view of how much of the completed building they want committed before they fund, and the same lender will move depending on the covenant strength behind the commitment. A single strong tenant on a long term can do more work than several weak ones. Anyone quoting you a universal percentage for commercial pre-commitment is quoting something that does not exist. The document quality question set out above is where the negotiation actually happens, and lease doc commercial property loans covers how lenders assess lease-backed income once the building is up.
If you are occupying the building yourself
The pre-commitment test does not apply in the same way. An owner-occupier is assessed on the trading business that will occupy the premises, so the analysis moves to serviceability, trading history and the removal of the rent the business currently pays elsewhere. Partial occupation, where you take part of the building and lease the rest, sits between the two and is assessed on both limbs. That case is worked through in how a lender reads a part-let owner-occupier building.
A live regulatory proposal, clearly labelled
This is a consultation, not a rule, and nothing in it applies today. APRA has consulted on changes to its treatment of land acquisition, development and construction exposures, including replacing the pre-sales requirement with a pre-lease requirement for build-to-let, and reducing qualifying pre-sales from 100 per cent of total debt to 50 per cent. Submissions close on 7 September 2026 and the proposed commencement date is 1 April 2027. The proposal applies to authorised deposit-taking institutions only and is scoped to residential development. It is included here because it is directionally relevant to how pre-commitment is treated, and for no other reason. The 50 per cent figure is a proposal and must not be read as a current requirement. Anyone planning a build on the assumption that it already applies is planning on a document that has not commenced.
Why do childcare centres, service stations and medical suites need more equity than a warehouse?
Specialised assets often need more equity because the lender has to ask what the property is worth and how readily it can be sold if the operating business is no longer there. A generic warehouse usually has a broad alternative-user market. A purpose-built childcare centre, service station or medical facility can have fewer buyers, higher conversion costs and a larger gap between business value and mortgage security value.
What makes an asset specialised
An asset is specialised when its value depends on a use that cannot easily be changed. The markers are consistent: purpose-built improvements that would need substantial capital to convert, an operating licence or approval attached to the premises or the operator, fit-out that is expensive to install and worth little on removal, a location chosen for the operating business rather than for general commercial demand, and a resale market measured in a handful of plausible buyers rather than a market of them. Generic industrial and office stock has none of these; the assets in the table below have several each.
The valuation split that drives the whole answer
On a specialised asset, the valuation basis matters as much as the headline value. Depending on the asset and the lender's instruction, the valuer may need to distinguish the real-property security from value created by the operating business, licences, goodwill or process-specific fitout. Those business elements may not support the same mortgage value if the lender ever has to sell the property without the operator. Ask what basis the lender instructed, what comparable evidence was used, and which value is actually being used to size the facility. The mechanism is worked through in going concern valuations on commercial property, and the security-side consequences in specialised security valuation.
| Asset type | Why a lender treats it as specialised | What the valuer must separate out | What the lender wants sighted before funding |
|---|---|---|---|
| Generic warehouse or office | Not specialised. Broad tenant and buyer market, low conversion cost, value independent of any one occupier | Nothing unusual. Land and improvements valued on comparable evidence | Building contract, planning approval, and the usual construction pack |
| Childcare centre | Value tied to the ability to operate a service at that address, plus purpose-built layout and outdoor space that is costly to repurpose | Going concern value driven by enrolments and operator goodwill, against bricks and mortar value with no operator in place | Evidence the premises can be licensed to operate under the applicable state or territory regulatory scheme, planning consent for the use, and the operator's experience |
| Service station | Tanks, canopy and forecourt are single-use, and the site carries environmental obligations that follow the land | Fuel and shop trading value against land and improvements, with any contamination or remediation exposure identified separately | Environmental site assessment, supply or branding agreements, and the relevant operating and storage approvals |
| Medical or consulting suite | Fit-out is expensive and practice-specific, and value depends on a narrow tenant pool of practitioners | Practice goodwill and patient base against the shell and the fit-out valued for an incoming unrelated tenant | Planning consent for medical use, any accreditation attaching to the premises, and the lease or occupancy position |
| Hospitality venue | Licensing attaches to the premises, kitchen and bar fit-out is costly and low-value on removal, and trade is location and operator dependent | Trading value including any licence against the underlying property with the licence and operator removed | The liquor or entertainment licence position, planning consent for the use, and trading evidence where a business already exists |
| Purpose-built industrial facility | Built around one production process, with plant, power supply or clearances that suit few other occupiers | Value to the current process against value to a general industrial occupier after stripping out the process-specific elements | Detailed specification, evidence of alternative use potential, and any environmental or process approvals |
This table deliberately carries no equity percentages. Indicative bands vary by lender and by file, and where they are discussed they belong alongside their qualifiers rather than in a table that can be lifted without them.
The resale assumption is tested the same way each time: the valuer and the credit team ask who else would buy this, at what price, and how long it would take. A warehouse in an established industrial estate has a deep answer to all three. A purpose-built facility on a site chosen for one operator may have one plausible buyer, or none without substantial conversion capital, and a long marketing period. That is what is being priced, and it is why two buildings of identical construction cost can attract materially different equity requirements. Where the specialised asset is a childcare centre specifically, the practical document set is set out in the childcare centre finance checklist.
From our broking, indicative
What lenders actually look at first on a commercial construction file is rarely the thing the borrower has spent the most time on. In practice the plans and the render matter far less than the contract, the entity structure and the interest position during the build. The deals that run smoothly are the ones where those three were settled before anyone ordered a valuation.
What gets these deals declined
- Serviceability tested without removing the rent the business currently pays, so the finished position looks worse than it is
- An agreement for lease that is not binding, presented as though it were a committed tenancy
- A builder without the balance sheet to carry a contract of that size
- A fixed-price contract carrying large provisional sums, which is a variable-price contract wearing a fixed-price label
- A specialised asset with thin comparable evidence, or a valuation basis the borrower misunderstood
- Land held in a different entity from the borrower, discovered late
- No cash available to service interest during construction, because the borrower assumed it would capitalise and the facility does not allow it
Indicative only, based on patterns across deals we have placed, as at August 2026. Not a quote, not an offer, not a saving and not an indication of approval likelihood. Actual terms and outcomes depend on lender policy and your circumstances at the time of application. Not financial advice.
Does the loan convert at the end of the build, or do you have to refinance?
Whether a commercial construction loan converts to a term loan or has to be refinanced depends on how the facility was documented at the start, not on any rule about the product class. Some commercial construction facilities are written as construction-to-term, so the debt converts to a term loan once the build is signed off. Others are written as a construction facility with a hard expiry date, and on that date the debt is repayable, which in practice means refinanced. Both are ordinary commercial structures. Neither is the default, and any source telling you that commercial construction loans simply become normal commercial loans is describing one of the two and calling it the rule.
The place to find your answer is the loan documents, not a product page. Read the facility term, the repayment clause and any conversion or roll-over clause. A facility described as construction-to-term usually commits the lender to a term product on stated conditions. What it generally does not do is commit the lender to a rate, a margin, or a limit set years earlier, and it rarely removes the lender's right to re-assess before the term loan starts. A conditional commitment is still conditional.
What gets re-tested at conversion
Expect three tests. Credit is commonly re-assessed against current financials rather than the ones that supported the original approval. The property is commonly revalued on an as-complete basis, and the term limit is sized against that new figure. Pricing is commonly re-set to the lender's current book rather than held at the construction margin. A conversion is closer to a fresh commercial loan with a head start than to a switch being flipped.
| What you are looking at | Construction-to-term facility | Facility that must be refinanced |
|---|---|---|
| How it was documented at the start | One approval covering both the construction period and a stated term product, with conversion conditions written in | A construction facility with a fixed expiry date and no committed term product behind it |
| What triggers the change | Practical completion plus satisfaction of the conversion conditions in the documents | The expiry date, which arrives whether or not the build is finished |
| Whether credit is re-assessed | Commonly yes, against current financials, unless the documents say otherwise | Yes, in full, by whichever lender takes the refinance |
| Whether the property is revalued | Commonly yes, on an as-complete basis, on the lender's panel | Yes, by the incoming lender on its own panel |
| Whether the rate is re-set | Commonly yes, to the lender's current pricing at conversion | Yes, to whatever the market offers you at that point |
| What you must produce | Practical completion sign-off, the occupancy or building certificate, final valuation, and current financials | The same pack, plus a full application to a new lender and time to run it |
| What happens if serviceability has moved | The term limit can be cut to what current cash flow services, leaving a cash shortfall to clear | The refinance can be declined outright, or offered smaller, on the same reasoning |
| What failure looks like | Conversion conditions unmet, the facility stays on construction terms and runs to its outside date | A finished building, an expired facility and a repayment demand you cannot meet from cash flow |
When should you test the term loan or refinance?
Before practical completion, not after it. Re-test the exit while there is still time to change course: current business financials or lease income, the expected as-complete valuation, the actual construction balance including any capitalised interest, and the term lender's current serviceability position. If the expected term limit is smaller than the construction debt, finding that out early preserves options that disappear once the construction facility is at expiry.
| Possible response | What it can solve | What it does not solve by itself |
|---|---|---|
| Ask the construction lender for an extension | A timing gap where the permanent exit is credible but not ready before facility expiry | A valuation or serviceability problem that leaves the permanent debt structurally too large |
| Inject cash or retained project equity | The difference between the construction payout and the term limit | A business that still cannot service the reduced term debt |
| Add acceptable security | A leverage or security shortfall where the borrower has another asset the lender will accept | Serviceability where the lender's term product remains income constrained |
| Refinance to another commercial or non-bank lender | A lender-policy, valuation, gearing or serviceability mismatch where another credit model produces a workable limit | An incomplete evidence pack or a project that has no credible long-term repayment path |
| Use short-term bridging or private credit | A defined timing gap to a credible permanent refinance, lease commencement, asset sale or other evidenced takeout | A permanent affordability problem. Short-term debt without a believable takeout can make the exit harder |
The paperwork gate before anything settles
Whichever branch you are on, the same evidence pack has to exist before money moves. That means the builder's sign-off at practical completion, the occupancy or building certificate issued by the relevant authority, the final as-complete valuation, and current financials for the borrowing entity. The certificate is the item that most often runs late, because it depends on a third party rather than on you or your lender, and a facility expiry date does not move because a certificate is sitting in a queue.
The failure this section exists to prevent is the one nobody writes about: the business no longer services the term debt on the day construction finishes. That happens for ordinary reasons. The build took longer than planned and the business carried rent somewhere else for an extra two quarters. Trading softened while the owner was distracted by a construction site. Interest that capitalised during the build made the finished debt larger than the approval contemplated. None of these is a credit event, and all of them can produce a term limit smaller than the construction balance. The gap between the two is cash you have to find, and the day you find out is very late in the process. If your facility is heading toward an expiry rather than a conversion, what happens when a commercial interest-only period expires covers the same mechanics in the refinance frame, and end debt on a commercial build deals with the sizing question directly.
One tax point that is commonly stated wrong
Capital works deductions on the construction cost are frequently described online as though a single rate applies. The Australian Taxation Office states that deduction rates of 2.5 per cent or 4.0 per cent apply to the construction costs of the capital works, depending on the date construction began, the type of capital works, and how they are used. It also states that the land itself cannot be written off and its cost is not deductible. All three conditions travel together, and which rate applies to your build is a question for your accountant rather than your broker. Source: Australian Taxation Office, Capital works deductions, as read 27 August 2026. This is general information about a published rule, not tax advice, and Switchboard Finance does not provide tax advice.
What if the valuation comes back short, or the clock runs out before the build is finished?
Act before the next draw or expiry date. A low valuation, cost overrun, delayed certificate, builder failure or lender change can all become a cash shortfall, but the available response depends on which test has failed: value, cost to complete, time, serviceability or lender appetite. The earlier that test is identified, the more realistic the options are.
Do not assume generic construction-loan advice is describing a commercial facility. Most Australian material answering what happens when a construction loan expires, or when a builder collapses, is about residential construction, and very little of it transfers. A residential borrower has regulated consumer credit behind them, a domestic building contract regime, and in most states a statutory warranty scheme that responds when a builder fails. A company building commercial premises has none of the three. A commercial file turns instead on its own facility agreement, building contract, security package, insurance, state law and current lender policy. Take contract, insolvency, security-of-payment and enforcement questions to a commercial solicitor.
| What has happened | What it actually means | What the response set looks like | What closes the options off |
|---|---|---|---|
| The on-completion valuation lands below total development cost | The valuation may become the binding base, reducing the amount the lender is prepared to advance | Read the valuation basis and comparables, test additional cash or security, reduce scope where contractually possible, or test another lender and valuation panel | Treating the headline value as the only issue and waiting until the draw that needs the extra money |
| The builder's progress claim is higher than the certified draw | The building contract and the loan are asking for different cash at the same point in time | Reconcile the claim with the quantity surveyor, identify unapproved variations or incomplete work, and establish who funds the difference before the builder's payment deadline | Assuming the lender must pay the builder's invoice in full |
| Variations or site conditions push the project over budget | The remaining facility may no longer pass the cost-to-complete test | Update the budget and cost-to-complete position immediately, then test borrower cash, additional security, a limit increase or a wider refinance | Committing to major variations before understanding the facility's consent and funding rules |
| The facility expiry is approaching and the build is not finished | A contractual repayment date is approaching while the security is still incomplete | Request an extension with a revised program and current cost-to-complete evidence, while running a refinance in parallel if the exit is uncertain | Starting in the final month when valuation, legal work and credit still have to happen |
| The building permit or planning approval is at risk of lapsing | The project can have a regulatory clock separate from the finance expiry | Check the actual approval and jurisdiction-specific extension process, and tell the lender because lawful completion affects the security | Assuming an extension of the loan automatically extends the permit or approval |
| The term limit at conversion is smaller than the construction balance | Current serviceability, value or lender policy supports less finished debt than the build now carries | Find the gap in cash or security, restructure the term debt, or refinance the whole position before the construction facility expires | Assuming the original conversion approval guaranteed the final dollar limit |
| The builder fails | The lender must reassess the remaining cost, program and ability to finish the security | Tell the lender, obtain a revised cost-to-complete position, and take the building contract, insurance, insolvency and security-of-payment issues to a commercial solicitor | Submitting another draw as though nothing changed |
| The pre-committed tenant walks | The repayment source and completed investment value may have changed | Re-let, re-evidence owner-occupier or vacant serviceability where relevant, and expect the lender to review the undrawn limit and exit | Waiting for practical completion before telling the lender |
| The construction lender stops funding or no longer fits the deal | You need a new lender to take an incomplete project, not merely refinance a finished property | Run a mid-build refinance using a fresh payout, valuation, builder review, completed-works position and cost-to-complete report | Assuming every lender will refinance work in progress or waiting until cash is exhausted |
General information only. These are possible response paths, not an assurance that any lender will approve an extension, variation, additional advance or refinance.
Why telling the lender early is the whole strategy
A lender that hears about a problem early is being asked to make a credit decision. A lender that discovers it late is being asked to repair a completed problem. Extensions, limit increases, variations and refinances need current information and credit time. Delay removes both. Keep the lender updated when the program, cost, builder, tenant or serviceability position changes materially.
Can you refinance a commercial construction loan to another lender mid-build?
Sometimes. An incomplete commercial build is underwritten from its current position, not from the assumptions that existed when construction started. The incoming lender has to reconcile the outgoing payout, security, work actually completed, unpaid claims, current builder position, verified cost to complete, approvals, insurance, as-is value, on-completion value and the exit that repays the new facility.
| Evidence | What the incoming lender is testing | Why it can break the refinance |
|---|---|---|
| Outgoing payout and security position | Exactly what must be repaid and discharged at settlement, including mortgages, caveats and other priority claims | The new facility must clear the outgoing position while still leaving enough capital to finish |
| Independent progress and as-is value | What has genuinely been built, its present security value and whether reported spend matches physical progress | Historical spend does not create value dollar for dollar, and defective or incomplete work can reduce usable security |
| Current QS cost to complete | Every remaining construction cost, contingency, interest and fee required to reach completion | An understated completion budget means the rescue facility is underfunded from day one |
| Builder and unpaid claims | Whether the existing builder can continue, what creditors are unpaid and whether any dispute or claim can interrupt the works | A builder dispute, insolvency or unresolved creditor position can make completion risk unmeasurable |
| Replacement builder, if required | A new contract, remaining scope, licences, insurance, revised price and realistic completion program | Changing builder usually changes the cost, timing and legal position the original loan was based on |
| Approvals, permits and insurance | That the existing works remain lawful and the project can continue without an approval or cover gap | Expired or non-transferable approvals can turn a finance problem into a project-delivery problem |
| Exit at completion | How the rescue facility will actually be repaid once the building is finished | A half-built asset is not an exit. The completed property still needs a sale, lease-supported refinance or business-supported term loan that works |
Not every lender will take work in progress, so the realistic lender set is smaller than for a finished-property refinance. Start before the existing facility, builder relationship or cash position becomes critical. If the original funder has actually withdrawn, what to do when a construction funder withdraws mid-build covers that branch in full.
Do commercial construction loans have the same protections as home loans?
Usually no. A commercial construction facility used wholly or predominantly for business purposes will generally sit outside the National Credit Code, so the Code's consumer-credit protections should not be assumed to apply. That does not mean the borrower has no protection: the loan documents, general law, unfair contract terms rules and, for eligible complaints, the Australian Financial Complaints Authority can still matter.
How the National Credit Code test actually works
Section 5 of the National Credit Code applies only if its conditions are met, including both who the debtor is and the predominant purpose of the credit. A company borrower can fail the debtor limb. A sole trader or other natural-person borrower may satisfy that limb but still fall outside the Code where the credit is predominantly for commercial business purposes rather than a Code purpose. The outcome therefore cannot be reduced to "commercial borrower equals company".
Where the Code does not apply, its section 88 enforcement rule does not apply either. Section 88 requires a Code-regulated credit provider, subject to the section's exceptions, to give a compliant default notice allowing at least 30 days to remedy before enforcement proceedings begin. That is different from saying no notice of any kind can ever be required on commercial credit. Contractual notice clauses and other legal requirements still have to be read on the actual facility.
Consumer-credit rules compared with business-purpose commercial credit
| Protection or issue | What to know on a commercial construction loan | Source |
|---|---|---|
| National Credit Code | Do not assume it applies merely because real property secures the loan. Section 5 tests both the debtor and the predominant purpose of the credit. | National Consumer Credit Protection Act 2009, Schedule 1, section 5 |
| Section 88 default notice | The Code's at-least-30-day default-notice rule applies to Code-regulated enforcement, subject to statutory exceptions. If the Code does not apply, section 88 is not the notice rule for the facility. | National Credit Code, section 88 |
| Responsible lending under the consumer-credit regime | Do not assume the consumer responsible-lending regime applies to a business-purpose commercial facility that sits outside the Code. | National Credit Act and Code, applied to the actual borrower and purpose |
| Unfair contract terms | Qualifying small businesses can have protection from unfair terms in standard-form financial-product and financial-service contracts. Eligibility and whether a term is unfair are legal questions, not lender-policy questions. | ASIC Information Sheet 211 |
| External dispute resolution | AFCA can consider eligible small-business loan and guarantee complaints, but the financial firm must be an AFCA member and the complaint must fall within AFCA's Rules. | Australian Financial Complaints Authority, small business |
| Other commercial-law protections | General protections such as misleading, deceptive or unconscionable conduct may still be relevant depending on the facts. | ASIC, disputes about commercial loans |
General information only. Whether a protection applies depends on the borrower, purpose, contract, lender and facts. This is not legal advice.
What should you ask your solicitor before signing?
Have a commercial solicitor read the default, review, stop-draw, material-adverse-change, guarantee, security and enforcement clauses before the facility is signed. Ask what events let the lender stop further construction advances, what notice and cure rights the documents provide, whether major contract variations need lender consent, how securities are released at refinance or sale, and whether the lender is an AFCA member. The most expensive time to discover those answers is after the build has already stopped.
A commercial construction loan is a chain of separate credit decisions, not one approval. Before signing, settle the product, ownership/security structure, contract risk and exit. Before first draw, clear every condition precedent. During the build, reconcile progress claims, variations and the cost to complete before they become cash gaps. Before practical completion, re-test the valuation, current serviceability and the term or refinance limit.
The best time to solve the next funding problem is one stage before the borrower normally searches for it.Frequently Asked Questions
There is no single deposit percentage that works across commercial construction lenders. The cash contribution depends on the lender's measurement base, the completed valuation, the asset type, whether interest is capitalised and how much acceptable land or other security equity you already have. The cash requirement section gives the five-step method for working the number out on your own build.
A construction loan is released in stages against verified building progress rather than paid out as a lump sum, and interest is charged on the balance drawn to date. On a commercial build, each claim is also tested against the remaining cost to complete. For an owner-occupier the lender focuses on the business that must service the finished debt; for build-to-lease it also reads tenant income, completed value and the exit. The first section sets out the full sequence.
Sometimes, but an early approval is usually conditional. A lender may assess a near-final contract, plans, costings, builder and borrower before every document is executed, while still requiring the signed contract, valuation, quantity surveyor report, insurance, security documents and other conditions precedent before the first advance. Do not make a commercial building contract unconditional merely because you have an indicative or conditional finance approval. The lender requirements section explains the sequence.
A builder's contractual claim and a lender's certified draw are separate. If the lender's quantity surveyor certifies less than the builder claims, the borrower can still owe the builder while receiving a smaller loan draw. The same gap can arise from an unapproved variation, higher provisional sum or a failed cost-to-complete test. Reconcile the claim immediately, identify whether the issue is timing, scope or a genuine overrun, and establish who funds the difference before the builder's payment deadline.
Sometimes, and it depends entirely on how the facility was documented at the start rather than on any rule about the product. A construction-to-term facility is written to convert once the build is signed off and the conversion conditions are met. A plain construction facility has a hard expiry date, and on that date the debt is repayable, which means refinanced. Even where a facility does convert, credit is commonly re-assessed, the property revalued and the rate re-set. This is the question this guide treats in most detail, in the section on what happens at the end of the build.
Commonly both, because lenders size to the lower of the two. Where the finished asset is worth comfortably more than it costs to deliver, cost binds and your equity is a share of cost. Where the completed value lands below total development cost, which happens regularly on specialised assets, the valuation binds and the equity requirement rises without the quoted ratio changing. The on-completion valuation is instructed by the lender on the lender's own panel, so it is not a number you control. The four candidate bases are set out in the section on what the loan limit is measured against.
Yes. Equity in land you already own can often reduce or replace a cash contribution, but the lender works from the value it accepts after existing debt and title interests. The land does not always have to sit in the same entity as the trading business: the lender may instead take a mortgage from the landowner plus guarantees or other security connecting the structure. Do not transfer land solely for an assumed lending rule without tax and legal advice. The land-equity section explains the structures.
Not always. An owner-occupier does not need an external tenant because the trading business is the repayment source. On a build-to-lease project, committed tenants can materially improve bankability, gearing and pricing, but there is no universal Australian pre-lease percentage. Specialist and non-bank structures can sometimes fund with low or no pre-leasing where the asset, equity and exit are strong enough. The tenant section explains what lenders read inside an agreement for lease.
Because the lender has to consider the value and saleability of the property if the operating business is no longer there. A generic warehouse usually has a broad alternative-user market, while a purpose-built childcare centre or service station can have fewer buyers, higher conversion costs and a larger gap between business value and mortgage security value. The valuation basis is lender- and asset-specific, so ask which value and comparable evidence are actually being used to size the facility. The specialised-assets section explains the mechanism.
Usually no. A commercial construction facility used wholly or predominantly for business purposes will generally sit outside the National Credit Code, but the result depends on both the debtor and the predominant purpose of the credit. Where the Code does not apply, its section 88 default-notice rule does not apply. That does not mean there are no protections: the facility documents, general law, unfair contract terms rules and AFCA can still matter where their requirements are met. The protections section sets out the distinctions.
The debt becomes repayable on the expiry date whether or not the building is finished, because a construction facility with a hard expiry is under no obligation to wait for practical completion. In practice the response set is an extension requested in writing well before the outside date and supported by a revised completion program from the builder, or a refinance run in parallel rather than started after an extension has been refused. Both take time, both are harder inside the final month of the facility, and an unfinished building is weaker security than a finished one. The branches are set out in the section on what to do when the number comes back short or the clock runs out.
The valuation becomes the binding number, so the limit falls and the difference becomes cash you have to find, even though the ratio you were quoted has not changed. Lenders commonly size to the lower of total development cost and the on-completion valuation, so a completed value below cost is exactly the case where the valuation binds. Before accepting it, ask for the basis of assessment and the comparable evidence, because a figure assessed on a specialised or bricks and mortar basis answers a different question from the one most borrowers have in mind. You do not control the valuer, since the lender instructs its own panel. The response set is in the section on what to do when the number comes back short or the clock runs out.
It becomes a funding problem as well as a contract problem, and the two run on different clocks. The lender applies a cost to complete test at every progress claim, so a half-finished building with a failed contractor can breach that test even where nothing else on the file has changed. The practical sequence is to tell the lender before the next progress claim rather than after it, get a revised cost to complete from the quantity surveyor, and take the contract position, any security of payment position and any insurance claim to a commercial solicitor. Switchboard Finance does not provide legal advice. The finance side of a stalled build is covered in the section on what to do when the number comes back short or the clock runs out.
Yes, interest is charged on the drawn balance, but whether it is paid monthly or capitalised into the facility is a separate term. Capitalising the interest can reduce the monthly interest cash outflow during construction, while increasing the debt that must be cleared at completion. Servicing it in cash keeps that component out of the final balance but adds to cash burn while the business may still be paying rent and other project costs. Ask which structure your term sheet uses before you sign it.
No. Both may use staged drawdowns, but a commercial construction facility is business-purpose credit built around its own facility agreement, building contract, security package, valuation and cost-to-complete process. A residential construction loan is a consumer product where different credit, contract and state-based building protections may apply. Do not copy a residential answer about draw stages, default rights, builder failure or insurance into a commercial file without checking the actual documents and jurisdiction.
Sometimes. An incoming lender usually needs the outgoing payout and security position, independent evidence of work completed, an as-is valuation, current QS cost to complete, builder and unpaid-claim position, approvals, insurance, on-completion value and a credible exit. If the original builder is gone, the replacement contract and revised completion program also have to work. Not every commercial lender will refinance work in progress, so start before the existing facility or cash position becomes critical.
Usually no, because fitout, refurbishment and minor extension works are more commonly funded by a term facility, a limit increase against existing security, or fitout and equipment finance, rather than by a staged construction facility. A construction facility exists to fund an asset that does not yet exist and releases money against certified progress, and that machinery only earns its cost where the works are substantial enough to need staged certification. Where an extension is structural and large relative to the existing building, it can sit on a construction facility. The first section of this guide carries a table matching each case to the product that fits it.
It takes as long as the slowest gate, and this guide prints no timeframe because the gates are controlled by different parties and most of them are not your lender. The sequence is credit assessment, valuation on the lender's panel, an independent cost report on the contract, documentation and registration of security, then first drawdown once your equity is in and every condition precedent is met. After that each progress claim has its own inspection and certification cycle. The gate that most often runs past a facility expiry is the occupancy or building certificate at the end, because it sits with an authority rather than with anyone on your file. The section on what a lender needs before it will look sets out which gate delays which.
The only cost figure that matters to a lender is your signed contract sum tested by a quantity surveyor against your drawings on your site, not a rate per square metre. Per-square-metre figures circulate widely in online cost guides and are national averages assembled from a mix of projects; they are useful for a feasibility sketch and no lender will fund against one. Three site-specific things move a real cost away from any published average: what the ground does, what the authority attaches as a condition of consent, and how much of the contract sits in provisional sums. A contract carrying large provisional sums has no reliable cost figure until those sums are resolved. The section on how much cash you need up front covers where the number should come from.
Goods and services tax is carried on construction costs, and the questions that decide what it means for you are tax questions rather than broking ones, so this guide names them instead of answering them. Whether it is recoverable and when depends on your registration, your reporting cycle and the intended use of the premises, and on a build it lands on progress payments across the whole construction period rather than once at settlement, which makes it a working capital question as well as a tax one. How the finished premises are treated on a later lease or sale turns on facts fixed at the start, including which entity holds the asset. Take all of it to a registered tax agent before the entity is chosen. The section on land you already own tables the three questions.
Building is a different question from buying, and the borrowing rules changed on 10 August 2026. From that date a limited recourse borrowing arrangement may be used to acquire real property only where the property is business real property, with carve-outs for arrangements entered into or refinanced, and for contracts exchanged, before that date. Separately, a limited recourse borrowing arrangement carries long-standing restrictions on what may be done to an asset while it remains subject to the arrangement, which is why fund-owned construction is a specialist question rather than an ordinary one. This is a summary of published rules as at 27 August 2026 and not advice on your fund; superannuation borrowing should go to your fund's adviser before it goes to a lender.
There is no single deposit figure for a commercial property loan, because the cash you need is a function of what the limit is measured against rather than of a fixed percentage. On a build, lenders commonly size to the lower of total development cost and the on-completion valuation, so two lenders quoting the same ratio can ask you for materially different amounts. Equity in land you already own, and security over other property, can stand in place of cash. The commercial property loans page covers the purchase case, and the section on how much cash you actually need up front covers the build.
How much a bank will lend on commercial property depends on the measurement base far more than on the headline ratio, and there is no single figure that holds across lenders or asset types. On a construction facility the limit is commonly sized to the lower of total development cost and the on-completion valuation, so a quoted percentage means little until you know which number it is a percentage of. Specialised assets attract higher equity requirements for resale reasons rather than punitive ones. The four bases lenders actually use are set out in the section on what the loan limit is measured against.
The best loan type for commercial property depends on whether you are buying an existing asset, building one to occupy, building one to lease, or building one to sell. Buying an existing property is a commercial term loan. Building premises you will trade from is a commercial construction loan, assessed on your business. Building to sell down is development finance, assessed on project feasibility and pre-sales. Fitting out or extending premises you already hold is usually none of the three. Choosing the wrong one is the most common structural mistake on a commercial build. The construction finance hub maps the options, and the first section of this guide carries a table matching each product to what you are actually building.
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