Commercial construction lending sits between commercial property lending and project finance. The credit risks are different from a stabilised income-producing property purchase, the loan structure is different, and the lender pool is narrower. For developers building commercial property for hold or sale, understanding the construction finance pathway is fundamental to project economics.
This guide covers how commercial construction loans work, the lender tiers, the drawdown structure, the builder qualification requirements, and the borrower-side framework for navigating construction financing.
Construction lenders fund a project, not a property. The project economics, the builder's covenant, the contract structure, and the take-out path all matter as much as the underlying land. The credit work is different from acquisition lending.
What Construction Loans Actually Are
A commercial construction loan funds the build of a commercial property (office, industrial, retail, mixed-use, hotel, specialist) from acquisition or refinance of land through to practical completion. The loan typically has three phases:
- Land settlement. Initial drawdown to settle on the development site.
- Construction drawdowns. Periodic drawdowns aligned with construction progress.
- Take-out. Refinance to a stabilised commercial loan, sale to an end-buyer, or strata-conversion sales.
1 The Lender Tiers
Major banks
ANZ, CBA, NAB, Westpac. Lowest interest rates, strictest credit criteria. Major bank construction lending favours experienced developers with track records, strong pre-sales or pre-leasing, and well-located assets. LVR caps typically 65% to 75% of completed value.
Tier 2 banks
Bank of Queensland, Suncorp, Bendigo and Adelaide, Macquarie Business Banking. Competitive on specific niches; faster decisions than majors in some cases.
Specialist non-bank construction lenders
La Trobe Financial, Thinktank, Resimac, Liberty Financial, and specialist construction-focused lenders. Higher rates, more flexible criteria. Useful for less-established developers or assets that fall outside major bank appetite.
Private credit and mezzanine
Private credit funds providing senior, junior, or full-stretch construction debt. Higher rates again; common for projects requiring higher LVR than senior lenders will provide, or for borrowers building track record.
2 Loan Structure
Loan-to-Value vs Loan-to-Cost
Construction loans are typically sized by reference to two metrics:
- LVR (Loan-to-Value). Loan as a percentage of the as-complete value of the project. 65% to 75% is typical for senior debt.
- LTC (Loan-to-Cost). Loan as a percentage of total project cost. 70% to 80% is typical.
The lender will typically apply the more conservative of the two limits.
Borrower equity
The borrower's equity contribution funds the gap between project cost and loan amount, typically required to be invested before construction drawdowns commence.
Interest treatment
Interest is typically capitalised during construction (added to the loan balance) rather than serviced monthly. The project's pre-completion income is nil; servicing requires cash from outside the project.
3 The Drawdown Mechanism
Construction loans drawdown in tranches aligned with construction progress. Each drawdown requires:
- Progress claim from the builder.
- Quantity surveyor (QS) certification that the claimed work is in place.
- Updated cost-to-complete analysis.
- Lender approval of the drawdown.
The QS is appointed by the lender (or jointly with the borrower) and provides independent certification at each drawdown. QS fees are typically borrower-paid; the QS reports to the lender.
4 Builder Qualification
Commercial construction lenders require the builder to meet specific qualification criteria:
- Builder license. Current and unrestricted for the project type and value.
- Track record. Completed projects of similar type and scale.
- Financial substance. Audited financials, working capital, banking facilities.
- Bonding capacity. Performance bonds, parent company guarantees, or insurance backing.
For larger projects, lenders may require additional measures: liquidated damages provisions in the building contract, parent company guarantees, builder's all-risks insurance with the lender as co-insured.
5 The Building Contract
The building contract between the developer and builder is a central document for the lender's credit decision. Common structures:
Lump sum fixed price
Most common for commercial construction. The builder commits to a fixed price for the defined scope. Variations require formal change orders.
Cost plus
The builder is paid actual cost plus a margin. Less common for commercial; lender appetite is lower because the final cost is variable.
Construction management
The construction manager coordinates subcontractors but does not carry the construction risk. Used for larger or more complex projects; lender appetite varies.
6 The Take-Out Path
At practical completion, the construction loan must be repaid or refinanced. Three principal paths:
Refinance to investment loan
The completed property is leased and refinanced into a stabilised commercial investment loan. Most common for developers building to hold.
Sale
The completed property is sold to an end-buyer (investor or owner-occupier). Most common for developers building to sell.
Strata-conversion sales
The building is strata-titled and sold lot-by-lot. Most common for mixed-use developments with a residential component.
The take-out path determines the lender's view of the project economics. Pre-leasing or pre-sales materially improve construction loan terms because the take-out path is partially de-risked.
7 Common Pitfalls
Cost overrun
Construction cost inflation, scope creep, or builder underperformance can produce cost overruns. The borrower must fund cost-to-complete; lenders typically require evidence of borrower funding capacity before approving additional drawdowns.
Builder failure
Builder insolvency mid-construction is the most disruptive credit event. The lender typically has provisions for builder replacement (performance bonds, builder failure insurance); the timeline and cost are still material.
Pre-sale settlement risk
If the project is funded with reliance on pre-sale settlement at completion, settlement failures or off-the-plan defaults can leave the project undersold. Buyer-deposit insurance and qualification of pre-sale buyers reduce this risk.
Take-out refinance risk
The investment refinance at completion may face different market conditions than at construction loan origination. LVR caps may be tighter, valuations may come in lower. Conservative LVR at construction provides headroom.
Frequently Asked Questions
Can a first-time developer get a major bank construction loan?
Difficult without a track record. Most major banks require demonstrated developer experience. First-time developers typically work with specialist non-bank lenders or partner with experienced developers.
What is the typical pre-leasing threshold for a major bank?
30% to 50% pre-leased (by income) for office and industrial; higher for retail. Specific thresholds vary by lender and project.
How does the QS reporting work?
The QS visits the site at each drawdown, reviews the builder's progress claim, and reports to the lender on what work is in place and what remains. The QS independence is essential to the construction lending process.
What's the typical construction loan term?
12 to 36 months depending on project size and complexity. Major projects (large towers, hotels) can be 36 to 48 months. Loan term should match expected construction period plus a buffer.