Technical Reference

32230  —  Development Finance Structures

Development Feasibility & Finance (32200)
1

Overview

Development finance structures comprise the debt, hybrid and equity-adjacent instruments used to fund a property development from acquisition through to practical completion. Node 32230 addresses the principal structures available in the Australian market, their relative risk position and the practice conventions governing their use during the development phase specifically, as distinct from finance provided against a completed investment asset.

The selection of a development finance structure materially affects project risk allocation, the cost of capital and the control retained by the developer. A development is typically funded through a combination of instruments forming a capital stack, with each instrument ranking differently in priority of repayment and bearing a correspondingly different cost and degree of control over the project.

Development finance in Australia is provided by authorised deposit-taking institutions operating under prudential regulation, and increasingly by non-bank and private credit providers operating outside that prudential framework but subject to disclosure and consumer credit obligations where applicable.

2

Scope & Boundaries

This node covers:

  • Principal debt, mezzanine and hybrid instruments used to fund the development phase of a property project
  • The relative risk, cost and control characteristics of development finance structures within a typical capital stack

This node does not cover:

  • Finance provided against a completed investment asset once a development has reached practical completion → refer to the 33200 sub-series
  • Equity capital partnering and joint venture structures → refer to Node 32240
  • SMSF-specific lending restrictions applicable to property → refer to Node 33140
Scope Note — Development Finance vs. Investment Lending

Development finance is provided against a project that does not yet generate stabilised income and is assessed primarily by reference to projected cost-to-complete and projected sale or completion value. This differs materially from investment lending against a completed, income-producing asset, which is assessed primarily by reference to that asset’s existing rental income and capitalised value, addressed separately within the 33200 sub-series.

3

Key Concepts

Senior Construction Debt
The primary debt facility funding a development, ranking ahead of all other debt and equity in priority of repayment and typically secured by a first-ranking mortgage over the development site and works.
Mezzanine and Subordinated Debt
Debt finance ranking behind senior debt in priority of repayment, typically used to bridge a funding gap between senior debt capacity and developer equity, and carrying a correspondingly higher cost reflecting its subordinated position.
Loan-to-Cost (LTC) and Loan-to-Value (LTV) Ratios
Lending covenants expressing the maximum debt a financier will provide as a proportion of total development cost or projected completion value respectively, used by financiers to constrain their exposure to cost overrun or value shortfall.
Drawdown Schedule
The agreed schedule under which development finance is progressively released against certified milestones of cost incurred or construction progress achieved, rather than advanced as a single lump sum.
4

Regulatory & Legal Framework

  • Banking Act 1959 (Cth)
    the Australian Prudential Regulation Authority
    Establishes prudential standards governing development lending exposure, risk weighting and capital adequacy for authorised deposit-taking institutions.
  • National Consumer Credit Protection Act 2009 (Cth)
    the Australian Securities and Investments Commission
    Regulates credit provided for certain residential development finance where the borrower is a natural person, imposing responsible lending obligations.
  • Corporations Act 2001 (Cth)
    the Australian Securities and Investments Commission
    Governs disclosure obligations for non-bank lenders raising pooled capital from investors to provide mezzanine or subordinated development finance.
  • Personal Property Securities Act 2009 (Cth)
    the Personal Property Securities Register
    Governs registration and priority of security interests granted over development assets, including those securing subordinated debt ranking behind a first-ranking mortgage.
5

Practical Application

ScenarioApplicationOutcome
Mid-scale residential project requiring construction fundingSenior construction loan drawn progressively against certified cost-to-complete milestonesDevelopment delivered within the approved drawdown schedule and loan-to-cost covenant
Development with a funding gap between developer equity and senior debt capacityMezzanine facility introduced, ranking behind senior debt and secured by second-ranking securityFunding gap closed without diluting the developer’s equity position
Non-bank lender providing development finance outside prudentially regulated settingsFacility structured and disclosed under managed investment scheme arrangementsFinance provided subject to Corporations Act disclosure obligations rather than banking prudential standards
6

Cross-Series References

Development finance structures also connect analytically to commercial and investment lending maintained elsewhere within the APN content architecture once a financed development reaches completion and refinances onto investment terms, though detailed treatment of that lending sits outside the scope of this node.

Findings are presented on the basis of data and evidence alone.