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Construction and Development Lending: What you need to know

The big four banks in Australia. Westpac, Commonwealth, ANZ, NAB.

As we discussed in an earlier posting, a newly renovated commercial property can earn more in rental yields as well as increase the value of your investment - a little construction sounds pretty tempting, doesn’t it? Or, maybe your business is doing so well that it’s outgrowing your current space. Or, perhaps you want to build a commercial property from the ground-up to customise it to fit your specific needs. There are many reasons why a business might need construction or development financing. But unless you have a secret coffer stuffed with cash, there are a few things you should know about these loans before you start ripping out walls or installing penthouse pools.

We’re not going to lie to you here, so the first thing you should know is that commercial development and renovation can be a very expensive proposition. It can also be a tough negotiation process with the banks that are risk repelled and regulation heavy. 

There are experts in the industry who know how to tackle this daunting task, who can help you assess the feasibility of your plans from a foundation of development experience and in-depth knowledge of industry trends; professionals who understand market forecasts and use financial modelling tools to analyse project potential, and who have the experience of preparing and presenting proposals to lenders who are genuinely interested in backing your project. There are professional brokers who are not restricted by the limitations of Australia’s Big Four Banks, but rather have access to non-bank (Tier 2) and private loans as well. Contact Acumen Finance and speak to a specialist, or access our online Mortgage & Development Feasibility Calculator to play with the numbers yourself. Your aspirations might be just a click away. 

What are Commercial Construction Loans?

As the name suggests, a commercial construction loan is used to finance the costs of constructing or renovating a commercial building. They can be used to purchase raw land and develop it from the ground up, to expand an existing facility and thereby it’s production capacity, or to add new life to a relic in need of up-scale resuscitation to attract high-quality tenants.

Get Ready...

When thinking of commercial construction loans, think big bucks - typically from hundreds-of-thousands of dollars to hundreds-of-millions. In today’s tighter lending climate, if you’re dealing with a bank, you’ll need to be uber prepared and organised, and it could take many weeks before you receive a bank approval, so patience is a must. 

Here are some tips to help you prepare. 

  • Be sure your project plans are in accordance with the site’s zoning regulations and that all construction and renovations have DA approvals. It’s also a good idea to check in with the local council for approvals in the pipeline for other projects that may compete with yours. Supply and demand is part of the success equation.
  • Do your homework and be sure that the demographics and location will support the business. 
  • A solid team will keep the project on schedule, and (hopefully) under budget. Hire only experienced, licensed builders and/or architects. It’s also a great idea to develop a good working relationship with the town planner to ensure your project has the green light. If that’s not an option, consider hiring an experienced commercial real estate valuer to review your project.  
  • If you’re planning on constructing a “speciality” building, such as aged or child-care facilities, be aware that the government has “speciality” regulations for them.
The Application

When soliciting a construction loan, whether from a bank, a Building Society (Tier 2 Lender) or a Private Lender, your application package needs to be professional and thorough. You should, at a minimum, include:
  • A site description, including zoning. If zoning changes are in the works, be sure to mention it.
  • An architectural drawing because a picture is worth a thousand words, and often easier to understand.
  • A feasibility study showing why your project makes sense and will generate a positive ROI.
  • Costings and timelines so there’s an easy-to-follow map of the milestones and expectations.
  • A CV for the builder, subcontractors, and any consultants you may work with (architect, planner, financial consultant). This shows the lender that the plan is thoroughly formulated and backed by professionals.
Get Set...

Generally speaking, you can usually get up to 50 to 60% of the property value for construction or renovation purposes - so, obviously, your commercial property valuation is an important factor in determining your eligibility. But you should understand that construction loans are based on the costs of the project, not the resulting value once a project is complete. 

Now, the loan-to-cost ratio varies from lender to lender, and most conventional lenders max out at 80 to 85%. So, if you need $200,000 for a project, you can expect a bank to approve only $160,000 to $170,000 - the balance is up to you. If you need the full 100%, there are options available, such as mezzanine financing, bridging loans, or even a private lender who may be willing to go all the way with you.


Once approved, you do not get a lump sum of money. No, lenders are taking a risk with your development dreams, so they will closely monitor your progress and release funds only when certain milestones are met, and often, only after an inspection. For example, the draw schedule for a new construction loan (building from the ground up) might look something like this:

  • The Deposit - Good job! The loan has been approved. Now go make it happen!
  • The Base stage - Grounds work, such as clearing of the property, laying foundation and infrastructure upgrades (sidewalks, drainage, etc.).
  • The Framed stage - Think the building’s skeleton. This includes plumbing, electrical and roofing and will be the stage where an inspection is most likely required.
  • The Lock-Up Stage - The external walls, windows and doors (hence the term “lock-up”) are completed.
  • Second Fix - At this stage, all the interior and exterior fixtures are put in place, such as kitchen and bathroom fittings, and final electrical work is completed. 
  • The Balance Due - anything in the loan agreement that has not already been distributed will be released. At this point, you should ensure that all liens have been settled.

Depending on the amount of the loan and the scope of the project, the draw schedule may vary according to project-specific milestones. For example, if you’re renovating an old building, you’ll likely have an inspection for electrical and HVAC installation, but you wouldn’t have one for the foundation work, obviously. 

As part of the bank’s efforts to reduce risk, they will want to see some, if not all of the following before releasing the next stage of funding:  

  • Builder’s and project manager’s progress reports to ensure your project is moving according to schedule. A bank may also require proof that the builder has paid off his suppliers and subcontractors to ensure there are no outstanding liens at the completion of the project.
  • Cash flow statements (definitely) and revised financial projections (if applicable).
  • A report of any construction delays or changes to the feasibility study. Time is money, and excessive delays can kill a project’s viability. Likewise, if you’re building a pub and suddenly the government outlaws alcohol, well then, obviously, you need to elect a new government, right?
  • And, if applicable, any income from pre-sales; for example, if you’re developing multi-residential units, the bank may stipulate that you need to have a certain number of the units sold to ensure that the project is viable. Note that pre-sales income cannot be used toward development costs and the funds from pre-sales must remain in a trust account.

Interest(ing) Twists

Construction loans are, typically, short-term (three to five years) interest-only loans until the full amount has been dispersed. The good news is that you will only be charged interest on the portion of the loan total that you have received

Many lenders will let you capitalise the interest (4 to 12%) during construction, meaning that the interest is added to the amount you owe - but be forewarned, this is compounded monthly so you’ll pay interest on interest if you elect this route, and you cannot exceed your loan-to-cost ratio (loan divided by project cost), meaning the deferred interest cannot push your balance owed beyond the initial loan agreement. 

Funding Options

As a Fintech facilitator bringing lenders and borrowers together, Acumen Finance has the resources to secure construction finance loans up to 100% of total costs. Our development finance rates start at a mere 4.5% per annum. We are experienced brokers who can help you with a low-doc loan, and we have a proven record of securing construction and development loans ranging from $400,000 to $100 million in a little as four days. We can provide you with a Conditional Letter of Offer in as little as 24 hours. 

The commercial property climate across Australia is heating up and waits for no one. Are you ready to take the next step? Contact us today, and speak with a team of experienced land developers, certified public accountants and legal professionals at the ready to help you plan, prepare and connect with the construction funding for your project.