How Development Finance Works: Staged Drawdowns, GRV & Exit Strategy Explained
How development finance works with staged drawdowns and exit strategy – Switchboard Finance
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How Development Finance Works: Staged Drawdowns, GRV & Exit Strategy Explained
How Staged Drawdowns Replace a Single Lump Sum
Development finance releases funds in tranches tied to construction milestones, not a single lump sum. A builder locks in a townhouse site at auction. The purchase price is only the beginning—hard costs (construction labour, materials, slab, frame, electrical, plumbing, finishes) stack up over 18–24 months. Rather than hand over all capital upfront, a lender releases funds as each stage completes and a quantity surveyor certifies progress.
This milestone-based model protects both builder and lender. The builder doesn't carry idle cash; the lender doesn't lose visibility into how funds are deployed. Each drawdown is contingent on documented progress: site acquisition, slab pour, frame completion, lock-up (roof + exterior), and final completion. If progress stalls, the drawdown stalls.
What Moves Faster
Fixed costs (land, council fees, insurance premiums) front-load early drawdowns. Lenders like to see capital allocated to tangible assets (land, slab) before trades start. This creates faster capital deployment in stages 1–2.
What Moves Slower
Fit-out, finishing, and final stage drawdowns lag. Supply chain delays, trade availability, and cosmetic work often push stage 4 (completion) beyond initial schedule. Lenders reserve flexibility here; some allow holdbacks (10–15% retained until final sign-off).
A typical timeline for a townhouse development looks like this:
| Stage | Milestone | Typical Timing |
|---|---|---|
| Stage 1 | Site acquisition, purchase completion | Month 0–1 |
| Stage 2 | Slab pour, concrete hardening | Month 3–4 |
| Stage 3 | Frame erected, first/second fix (electrical, plumbing) | Month 6–8 |
| Stage 4 | Lock-up (roof, external walls, windows) | Month 9–11 |
| Stage 5 | Interior finishes, fit-out, final inspections | Month 14–18 |
| Stage 6 | Completion, title release, buyer settlement | Month 18–24 |
TDC, GRV and the Numbers That Drive Every Approval
Total development cost (TDC) and gross realisation value (GRV) are the financial backbone of every development approval. TDC is the full all-in build cost; GRV is the total value when units sell. The margin between them (GRV minus TDC) is the profit pool—and it determines whether a lender will fund at all.
Lenders typically want to see a margin of 15–25% (varies by lender, risk profile, and market). If TDC is AUD 800,000 and GRV is AUD 950,000, the margin is AUD 150,000 (18.75%)—lenders see this as buffer against construction cost overruns, interest capitalisation, and market softness. Below 12–15%, many lenders walk away; above 30%, they ask why your pricing is so conservative.
- Land cost: AUD 400,000
- Hard construction costs: AUD 320,000
- Soft costs (permits, engineering, insurance, finance): AUD 80,000
- Total Development Cost (TDC): AUD 800,000
- Estimated market value (GRV) on completion: AUD 950,000
- Margin: AUD 150,000 (18.75%)
This margin is not profit—it's the shock absorber. Construction often overruns by 5–10%. Interest capitalisation during construction adds cost. A market softness of 5% can erase 25% of planned margin. Lenders stress-test this ruthlessly. They'll ask: "What if GRV falls 10%? What if TDC rises 15%? Can the developer still exit?" If the answer is no, the approval dies.
LVR (loan-to-value ratio) also matters. Some lenders cap development finance at 70% TDC; others go to 75% or even 80% for strong sponsors. The remaining 20–30% comes from equity—your cash, joint venture partner equity, or pre-sales. This equity cushion is what lenders actually respect.
How QS Reports and Capitalised Interest Work
Quantity surveyor (QS) sign-offs unlock each drawdown. A QS is an independent third party—not the builder, not the lender—who inspects work, certifies completion of each stage, and validates costs incurred. Without a QS sign-off, the lender doesn't release funds. This is why builders sometimes complain about QS bureaucracy: it's the lender's eyes on site.
At each drawdown, the QS confirms stage completion, calculates remaining TDC, and signs a certificate. The lender then releases funds, typically retaining a 5–10% holdback pending the next stage. This holdback incentivises the builder to complete on schedule and standard.
Capitalised interest is interest that accrues during construction and is added to the loan balance rather than paid monthly. Instead of paying, say, AUD 8,000/month in interest during an 18-month construction, the developer lets that interest roll into the loan. At completion, the loan balance is higher—but the developer hasn't forked out cash monthly. Some lenders cap capitalised interest at 8–10% of TDC; others are more generous.
- Loan amount: AUD 640,000 (80% of AUD 800,000 TDC)
- Interest rate (indicative): 10% per annum
- Construction period: 18 months
- Monthly interest (if paid): AUD 5,333
- Total interest over 18 months (if paid): AUD 96,000
- Capitalised interest added to loan: AUD 96,000
- New loan balance at completion: AUD 736,000
This matters because at completion, you owe more than you borrowed. If GRV is AUD 950,000 and the loan is now AUD 736,000, your equity cushion is AUD 214,000 (22.5%)—still solid. But if GRV was AUD 920,000, equity drops to AUD 184,000 (20%). This is why lenders ask: "What's your plan to refinance or exit before interest capitalisation blows a hole in your margin?"
Exit Strategy: Why Lenders Care More About How You Finish Than How You Start
Exit strategy is the single most scrutinised aspect of any development loan. Lenders approve on the assumption you have a clear, credible plan to exit—that means cash the development down (sell units, refinance, or sell the whole asset) within the loan term. A builder with a stellar track record and watertight TDC/GRV numbers will still be rejected if the exit plan is vague.
There are three main exit routes: pre-sales (units sell before completion), refinance (develop at non-bank rates, then refinance to a bank at lower rates on completion), and sell-down (sell the entire development to an investor or wholesaler at or before completion). Each has different lender appetite.
| Exit Type | How It Works | Lender Risk |
|---|---|---|
| Pre-Sales | Units sell to end-buyers off-the-plan; settlement staggered at completion. Buyer deposits (5–10%) provide equity buffer during build. | Low. Cash flows in. Lender is repaid from sale proceeds. Marketing risk is on you, not the lender. |
| Refinance | Development finance bridges construction. On completion, property refinances to a bank at lower rates. Developer holds asset long-term or sells later. | Medium. Assumes bank will refinance post-completion. If valuation comes in soft or market rates spike, refinance may not happen at assumed rates. |
| Sell-Down | Entire project or bulk units sold to an investor (often an institutional buyer) at or near completion. Lender is repaid from sale proceeds. | Medium-High. Assumes buyer exists and will close. Market downturn = no buyer. Lender has no fallback. |
Pre-sales are lender gold. If 60–80% of units are pre-sold by stage 3 or 4, a lender sees cash flowing in, buydown risk is minimal, and the development is essentially de-risked. Many non-bank lenders (regulated by APRA) love pre-sales because they reduce uncertainty. Banks, conversely, often require 40–60% pre-sales before releasing construction funds.
Refinance exits assume you can swap a development facility (9–12% interest) for a bank mortgage (5–6% interest, illustrative only) post-completion. But this hinges on the valuation holding and rates not spiking. If the property values at AUD 920,000 instead of AUD 950,000, the bank won't fund a AUD 700,000 mortgage (75% LVR). You're stuck with the development lender, paying higher rates longer.
Sell-down is the most binary exit. Either the buyer shows up and closes, or you're stuck with a completed asset you can't move. Lenders scrutinise buyer pre-approval, deposit terms, and settlement timeline. A vague "we'll find a buyer post-completion" is a non-starter.
The best practice: build exit optionality. Pursue pre-sales hard but plan a refinance as a fallback. If refinance doesn't work, you've got pre-sales to draw down. If neither works, have a sell-down buyer lined up. Lenders want to see you've thought three steps ahead, not just hoped the market stays flat.
FAQ: Development Finance Essentials
Standard commercial loans are drawn once and repaid over a fixed term (typically 5–10 years). Development finance is drawn in staged tranches tied to construction milestones. Interest rates are higher (reflect construction risk), and the loan term is typically 12–24 months construction plus 12–36 months exit window. You're also required to have a clear exit plan—lenders want to know how you'll repay, not just hope the asset appreciates.
See Commercial Property Loans for standard mortgages.
Yes, but terms and rates vary. Some lenders offer "development-style" facilities for large renovations (AUD 200,000+). The key difference is risk profile: a renovation on an existing asset is lower risk than a greenfield build. Capitalised interest may apply; drawdown schedules are tied to valuer or surveyor certification of work completion. For smaller renovations, you might qualify for Private Lending instead, which is faster but costlier.
TDC overruns are common. If costs blow out 5–10%, lenders typically allow it because the margin was stress-tested. If overrun is 15%+, you'll need to inject more equity or negotiate a top-up facility. A top-up means additional borrowing at (usually) higher rates—it reduces the project's profitability. This is why lenders insist on a TDC buffer: it absorbs the inevitable 5–10% creep without killing the project. Always build in a 10–15% contingency on TDC upfront.
Mezzanine finance is a second-ranking loan sitting between senior debt (the main development facility) and equity. It's pricier (12–18% interest, illustrative) but subordinated—it takes a haircut if the project distresses. Developers use mezzanine to bridge equity gaps. For example: if a project needs 80% senior debt but a lender will only fund 70%, mezzanine covers 8–10% and equity covers the final 10–12%. Mezzanine is faster to arrange than equity but slower than senior debt.
Yes, but it's expensive. Loan extensions are usually granted, but at a premium (an extension fee, plus higher interest rates to reflect increased risk). The lender will also require evidence that the stall is not your fault (supply chain, council delays, weather) and that you have a credible plan to restart. If the project is stalled due to poor management or underestimated costs, lenders are less forgiving. The best practice is to build schedule buffer upfront and negotiate a 12-month extension option at drawdown—this costs a small fee but saves you from emergency negotiations later.
For alternative funding during stalls, explore Business Loans for working capital or Caveat Loans for short-term bridging.
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