Commercial Development Loans: Funding a Build to Sell or Lease
How lenders assess a commercial development loan for industrial, retail, office or mixed-use builds: pre-leases, end value on rent, equity and exit.
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Commercial Development Loan · Pre-Leases · End Value
Who will occupy the building, what will they pay, and for how long? On a commercial development those three answers decide how much a lender will fund and how much of your own money has to go in first.
Quick Answer
A commercial development loan funds industrial, retail, office or mixed-use buildings built to sell or lease, and lenders assess it on tenants and rent rather than on presales alone. Pre-leases, an end value drawn from capitalised rent and a clear exit decide how much a lender will fund; see development finance and how it compares with a commercial property loan.
Also called: commercial development finance, commercial property development loan, commercial construction finance for developers. All three name the same product, a staged facility for a commercial building put up to sell or lease.
What is a commercial development loan?
A commercial development loan funds the land, construction and costs of an industrial, retail, office or mixed-use project that is built to sell or lease. The common misconception is that it is a residential project with a different buyer at the end. It is not. A residential development lender reads presales; a commercial development lender reads tenants, rent and the value that rent supports.
Typical projects include a row of strata warehouse units, a small retail strip, a medical or office building, a showroom, or a mixed-use building with shops below and apartments above. The facility is structured like other development finance: the lender funds against a feasibility, releases money in stages as the build progresses, and expects to be repaid from sale or refinance at the end. For the full picture of how development lending works, start with the property development finance guide.
Two neighbouring questions are answered elsewhere. If your own business will occupy the finished building, that is an owner-occupier build, covered in how commercial construction loans work. If you are still choosing between products, read commercial property loan or development finance for builders first. A manufacturer adding a factory on land it already trades from has its own path in factory extension and greenfield development finance. This insight is for the developer, builder or business owner putting up a commercial building for someone else to buy or rent.
How do lenders assess a commercial development compared with a residential one?
Lenders assess a commercial development on income and tenant quality, where a residential development is assessed mainly on presales and comparable sales. The feasibility still has to work, and the lender still compares the loan with the gross realisation value and the total cost, but the evidence behind each number changes.
| What the lender checks | Residential development | Commercial development |
|---|---|---|
| Evidence of demand | Signed presale contracts with deposits | Signed pre-leases or agreements for lease; presales where units are built to sell |
| How the end value is set | Comparable sales of similar dwellings | Income capitalisation: market rent divided by a market yield |
| Main risk the lender prices | Sell-down: units that do not sell or settle | Letting up: space that stays empty after completion |
| Usual exit | Unit sales settling at completion | Sale of the building or units, or refinance once leased |
| Who usually lends | Banks, non-bank lenders and private funders, varies by lender | Fewer banks on speculative builds; non-bank and private funders, varies by lender |
The feasibility guide covers the full test and answers whether the same rules apply to a commercial development. What lenders actually look at first on a commercial file is not the margin. It is who will occupy the building when it is finished, what they will pay, and for how long.
Do pre-leases replace presales on a commercial development?
Pre-leases do the job that presales do on a residential project: they show the lender that income will exist when the building is finished. On a commercial build the lender is usually looking for pre-leases in place of presales, signed before construction starts, and it reads four things in them.
- Who is the tenant? The lender weighs how established the tenant's business is, its financial strength, and whether a parent company or director stands behind the lease.
- How long is the lease? From the underwriter's seat, the test is the tenant's covenant and the lease term against the loan term. A lease that ends before the debt is refinanced leaves the lender exposed to vacancy at exactly the wrong moment.
- How much of the building is committed? The share of lettable area under signed leases matters, and the level a lender wants before the first drawdown varies by lender and by asset type.
- What backs the lease? A bank guarantee or security deposit from the tenant, and an agreement for lease that converts to a lease at completion, both carry weight.
APRA's prudential practice guide on the standardised approach to credit risk, APG 112, says a bank lending against commercial property that depends on rent must assess the tenancy profile against the loan's maturity. For development lending it describes good practice as pre-sale contracts that are legally binding, at arm's length, backed by a non-refundable minimum deposit and carrying sunset dates consistent with completion. Non-bank lenders are not bound by it, but most read leases the same way because the same refinance risk sits on their book.
Source: Australian Prudential Regulation Authority, APG 112 Capital Adequacy: Standardised Approach to Credit Risk, current version dated 30 September 2024. Read 12 October 2026.
Pre-leased build
- Anchor tenant signed before construction
- Lease runs past the loan term
- Guarantee or deposit held from the tenant
- End value supported by contracted rent
Speculative build
- No signed tenant at first drawdown
- End value rests on assumed leasing
- Letting-up period priced into the feasibility
- More equity and fewer lenders
If an anchor tenant is signed and you want to test the file before committing to a builder, you can check eligibility first.
How is the finished value of a commercial development set?
The finished value of a commercial development is usually set by capitalising its rent: the valuer takes the market rent the building should earn and divides it by a market yield for that asset type and location. That gives an end value set on rent, not on comparable sales, which is why a small change in the assumed rent or yield can move the number a long way. A strata project where each unit is sold separately may still lean on comparable unit sales, so the valuation method follows the exit.
Where leases are signed, the valuer works from the contracted rent and checks it against market. Where they are not, a speculative build is valued on assumed leasing, varies by valuer: the valuer assumes market rent, then deducts an allowance for the time it takes to let the space, incentives to attract tenants and leasing fees. That deduction is often what separates a feasibility that works on the developer's numbers from one that works on the lender's.
How the valuer reports the as if complete figure, and when the report should be ordered, is covered in what lenders test in a development feasibility. For how a lender sizes debt off rent once the building is finished, see the commercial property income test for developers.
How are strata industrial and warehouse unit developments funded?
Strata industrial and warehouse unit developments are usually funded like a residential presale project, because the units are built to sell rather than lease. Lenders count signed unit contracts as presales, read the deposits and sunset dates, and apply their own test to how many must be in place before the first drawdown.
The buyers are often owner-occupier businesses: a tradie, a small manufacturer or a logistics operator buying a unit with a commercial property loan of their own. That makes the buyer's finance part of the developer's risk, because a unit buyer who cannot settle turns a presale into unsold stock. Our notes on warehouse unit deposits and settlement cash show what those buyers face at settlement.
Unit size, clearance height, roller door access, hardstand and power supply all affect how quickly units sell and what a valuer will accept, so lenders look closely at the product mix. GST applies to the sale of new commercial units, and how it is handled changes the net proceeds; take that question to your accountant and see GST and the margin scheme in development funding. For the purchase side of these deals, see warehouse and industrial property loans.
How much equity does a commercial development need?
A commercial development usually needs more equity than a residential project, indicative and varies by lender, and a speculative build typically needs more again than a pre-leased one. Part of the reason is bank capital. Under APRA's capital rules, banks hold more capital against land acquisition, development and construction lending than against most other property loans, which makes development lending expensive for them and limits how far they stretch on commercial projects without strong tenants or presales.
Non-bank lenders and private funders fill much of that gap, generally with higher pricing and shorter terms. Where the senior loan stops short of what the project needs, some developers add a second layer of debt; mezzanine finance explains how that capital stack works and what it costs. How lenders combine loan to cost and loan to end value limits, and how much of your own money must go in first, is set out in the development finance approval numbers. Land you already own can often count toward your contribution, subject to valuation.
Before you approach a lender, the construction loan pack lists the documents a development file needs, and the Construction Hub gathers our other guides for builders and developers.
What happens to a commercial development loan at completion?
A commercial development loan is repaid at completion by selling the building, selling the units, or refinancing into an investment loan once the building is leased. A fully leased building is the cleanest exit: the developer refinances into one of our commercial property loans serviced from rent, or sells to an investor at a price the leases support. Whether the finished building is passive or occupied by its owner changes how the next lender reads it; see passive versus owner-operated commercial property.
Strata units are repaid as each sale settles. Units still unsold at completion can move to a facility designed for unsold stock; see residual stock loans. What happens to the facility on the day of practical completion, and whether it turns into an ordinary mortgage, is covered in development loans at practical completion. Plan the exit before you sign the facility, not after the last pour.
A commercial development loan funds a building put up for others to buy or rent, and the lender reads it through tenants, rent and yield rather than presales alone. Pre-leases do the work presales do on a residential project, the end value comes from capitalised rent, and a speculative build carries a letting-up deduction and a larger equity contribution. Strata unit projects sit closer to residential, with presales from business buyers. Every version needs an exit planned before the first drawdown.
Key takeaway: sign the anchor tenant or the unit buyers before you ask a lender to fund the build, because that evidence sets both the end value and the equity you need.Frequently Asked Questions
Getting a loan for a commercial building is harder than getting one for a house, because the lender has to be satisfied about tenants, rent and the exit as well as the borrower. It is easier when leases are signed before the build and the feasibility leaves room for a valuation below the developer's figures. A broker can match the file to development finance lenders that take commercial projects.
Commercial development loans are offered by major banks, non-bank lenders and private funders, and each group has a different appetite. Banks tend to prefer pre-leased projects with experienced developers, while non-bank and private funders take more speculative builds at a higher price. The structure is the same staged development finance used on residential projects.
Commercial property development finance works as a staged facility: the lender funds part of the land and construction cost and releases money as each stage is certified. The lender sizes the loan against total cost and the end value, which on a commercial build usually comes from capitalised rent. The property development finance guide sets out the full process.
A development loan to build warehouse units to sell is a common commercial project, and lenders usually treat it much like a residential presale development. Signed unit contracts count as presales, and the lender sets how many it needs before the first drawdown. The buyers' own ability to settle matters, because most will use a commercial property loan.
A speculative commercial build usually needs more equity than a pre-leased one, because the end value rests on assumed leasing and the valuer deducts an allowance for letting up. Fewer lenders take speculative builds, and those that do generally lend less against cost. The development finance approval numbers show how the equity test is applied.
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