Property Development Finance
A development loan is repaid by something that does not exist yet. The bank reads everything that has to happen before it does.
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
A bank reads a development loan backwards, from the developer's margin to everything that could take it away. It sets the loan against total cost, with the developer's equity in first; counts presales against the debt and reads their quality; checks the contingency, and before every drawdown has a quantity surveyor certify the work and a cost-to-complete test confirm the money left will finish the project; reads the developer's record; and reads the exit if units do not sell. In Issue 08 the price cushion is wide and the cost cushion thin.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
// MAKE THE CALL
Issue 08 — Basalt Ridge Developments. A new-to-bank developer, a claimed 28% ROE and two other banks circling. Your bank has a growth target. Your call first, then the senior banker's.
// WHY A DEVELOPMENT LOAN IS DIFFERENT
Most business loans are repaid from a trading business's cash flow, year after year. A development loan is repaid once, from the sale of a finished project, and until then the business produces no cash at all. So the lender cannot read three years of accounts and ask whether they will continue. It reads a plan — what the project will cost, what it will sell for, who has already bought — and the people who will carry it out.
Issue 08 is that plan. Basalt Ridge Developments asks a bank it has never borrowed from for US$8.5m of senior debt to build 24 townhouses on land it has already bought. Its file publishes the feasibility as submitted, and every number below comes from it.
// 01 — THE FEASIBILITY, READ BACKWARDS
A developer reads a feasibility forwards, to the margin at the bottom. A lender reads it backwards, from the margin to everything that could take it away.
Read backwards, the file has two cushions, and they are very different sizes. On price: the four sold townhouses are fixed, so everything rides on the 20 unsold. Their prices could fall about 21% before the developer's whole margin was gone, and about 66% before the sales no longer repaid the bank's US$8.5m. On cost, the cushion is the contingency: US$0.34m, 3.5% of the build — and an overrun of just 5% on US$9.60m of construction would be US$0.48m, more than the whole of it.
That is the shape of most development risk. Projects rarely fail because the last few units sold for a little less. They fail because they cost more, or took longer, than the plan — and interest keeps running on the drawn loan every month the finish is late, which the US$0.82m of finance costs in the budget assumes will not happen.
// 02 — WHO PUTS MONEY IN FIRST
Developer's equity: US$6.96m — in first, the land already paid for
In a development the developer's money goes in before the bank's, and the bank then lends the rest as the building goes up, in stages. Loan to cost measures the split: here the bank would fund 55% of everything going into the ground, and the developer's US$6.96m is the first money lost if the project goes wrong. The LVR guide sets loan to cost beside the loan to value ratio.
Before each stage is released, two things are checked. An independent quantity surveyor inspects the site and certifies what has been built, what it cost and what is left. And the bank runs a cost-to-complete test: the undrawn loan plus any equity not yet spent must still be enough to finish. If an overrun has broken that, the developer puts more money in before the bank lends another dollar — which is why a thin contingency is a question about the developer's spare cash as much as about the budget.
// 03 — PRESALES: THE PART ALREADY SOLD
Against the debt: 40%, where the bank's policy line is 60%
A signed sale with a deposit is the only part of a development's end value that exists before it is built. Presales prove that buyers want the product at the feasibility's price, and at settlement they repay part of the loan. So lenders count them against the debt, and read their quality as well as their number: how large the deposits are and where they are held, whether a buyer can walk away if the project finishes late, and whether the buyer will be able to finance the purchase at settlement, when the market may have moved.
Basalt Ridge's US$3.4m covers 40% of the debt — twenty points short of the line, in a suburb whose prices are down 4% in six months. The buyer's chair reads the same contracts from the other side: what someone who signed off the plan should ask before anyone needs them to.
Presales are also where lenders differ most. New Zealand's Reserve Bank has noted developers turning to non-bank and offshore lenders, which often ask for fewer presales than banks — which is why a developer short of the line can usually find a lender who asks fewer questions, and why that lender is carrying the risk the questions were about.
// 04 — THE DEVELOPER
The plan is only as good as the people carrying it out, and a development lender reads a developer's record the way a trading lender reads three years of accounts. Basalt Ridge's deck lists 6 completed projects and a claimed average return of 28% — and not one settlement statement behind any of them. The number that would make the file persuasive is the one it cannot verify.
That is also why a first project with a new bank rarely gets the full ask. The developer's chair is that conversation from the developer's side: a bank that wants the next six projects, and will not fund this one as asked.
// 05 — THE EXIT
The loan is repaid as sales settle. What the bank worries about at the end is the units that have not sold: once the building is finished, whatever debt is left is secured on unsold stock, and the loan has quietly become a different loan — a bet on a market the bank did not set out to take. A lender reads the exit before it lends: how many units must sell to repay it, how long that might take at today's pace, and whether the developer could carry the rest, or refinance it, if they do not.
// STANDARDS THIS SITS BESIDE
The recognised ground this page sits beside. Each was opened and checked when cited; none is a source for the framework itself.
- Office of the Comptroller of the Currency, Comptroller's Handbook: Commercial Real Estate Lending, Version 2.0 (March 2022) — Acquisition, Development and Construction loans, pages 5, 22–23, 34 and 45–48 — Development lending policy sets presale requirements and limits on cost as well as value; the budget must fund completion; each draw is matched to progress confirmed by an independent inspection.
- European Banking Authority, Guidelines on loan origination and monitoring, EBA/GL/2020/06 — section 5.2.8, Lending for real estate development, paragraphs 175–181; Annex 1 — The developer's costs should be verified by an independent expert and include contingencies for overruns, and construction is monitored through site visits by professionals such as quantity surveyors — section 02.
- Interagency Guidelines for Real Estate Lending Policies, 12 CFR Part 34, Subpart D, Appendix A — US supervisors set lower loan-to-value limits for land and construction than for completed property, and expect disbursements not to run ahead of actual costs.
- Reserve Bank of New Zealand, Financial Stability Report, November 2025 — Chapter 1, Challenges in the construction sector, page 11 — Notes developers turning to non-bank and offshore lenders, which often have less stringent presale requirements than banks — section 03.
// QUESTIONS PEOPLE ASK
- How do banks assess property development finance?
- By reading the feasibility backwards: what the finished project will sell for, what it will cost to build, and how far either can move before the developer's margin is gone and then before the loan is uncovered. Around that the bank reads the developer's own equity and when it goes in, the presales and how real they are, the contingency and the building contract, the developer's record on earlier projects, and how the loan is repaid if some units do not sell.
- What is loan to cost in development finance?
- The development loan divided by the total cost of the project — land, construction, contingency, fees and finance costs. It shows how much of the money going into the ground is the lender's; the rest is the developer's equity, which normally goes in first and is the first thing lost if costs overrun or prices fall.
- Why do banks require presales for a development loan?
- Because a signed sale with a deposit is the only part of a development's end value that exists before it is built. Presales show that buyers want the product at the price in the feasibility, and they repay part of the loan at settlement. A lender reads their quality as well as their number — how large the deposits are, whether buyers can walk away if completion is late, and whether they will be able to finance the purchase when it settles.
- What is a cost-to-complete test?
- A check, made before each drawdown on a construction loan, that the money still available — the undrawn loan plus any equity not yet spent — is enough to finish the project. If costs have risen so that it is not, the developer has to put in more money before the bank lends any more. It exists so that a project never reaches a point where the loan has run out with the building half-finished.
- What does a quantity surveyor do for a development lender?
- Checks the budget before the loan is approved, and then, before each drawdown, inspects the site and certifies that the work claimed has been done, that its cost is reasonable, and what it will cost to finish. The lender relies on that independent certificate, rather than the builder's invoice or the developer's word, to decide how much to release.
// THE WHOLE FEASIBILITY, OPEN
Issue 08's file publishes Basalt Ridge's budget, sales, funding and six-project record, with the bank's arithmetic beside it — and asks what you would lend.
Open Issue 08's file →