How property developers fund the gap between senior debt and the finish line

Most development projects do not fail because the idea was bad. They fail, or stall, in the gap: the stretch where the money the project needs is larger than the money anyone has agreed to provide. A senior lender funds a share. The developer funds a share. The rest has to come from somewhere, at a time that suits a construction programme and not a bank’s credit cycle.

This guide walks through where those gaps appear, what fills them, and how to cost the choice.

Why is there a gap at all?

Senior development lenders protect themselves with two limits. One caps the loan against what the project costs to deliver (loan-to-cost). The other caps it against what the finished product is expected to be worth (loan-to-value). The lower of the two usually decides the loan, and both leave a margin for the developer to carry. The loan-to-cost ratio entry explains the first one in plain terms.

That margin is the gap. On a $6 million project, a lender funding 65% of cost advances $3.9 million. The developer has to find $2.1 million, usually split between cash equity and the value of the land already owned.

Banks are generally the cheapest source of development debt, and for a developer with a track record and sound pre-sales, a bank facility deserves serious attention. The gap appears when the bank’s limits are lower than the project needs, when pre-sales fall short, or when the timing is too tight for its process.

Where do the gaps open up?

Three points come up again and again.

1. At acquisition. The land contract needs a deposit and settlement funds before the senior facility can be fully drawn. Lenders often require the developer’s equity to go in first, which means the cash is out the door before any debt arrives.

2. Between construction draws. Lenders release funds in stages against certified progress. A builder’s claim is presented, a quantity surveyor inspects, and payment follows days later. In the meantime, trades want to be paid and costs such as authority fees, utilities and design variations arrive outside the schedule.

3. After completion. Practical completion triggers the end of the construction loan’s drawdown period. Sales settle over weeks or months, but the loan must be repaid at maturity. If settlements are slow, there is a gap between what you owe and what you have collected.

What fills the gap, and at what cost?

Each layer sits behind the one above it, which means it carries more risk for its lender and costs more for you.

Layer	What it is	Relative cost	Notes
Senior debt	Construction or development loan	Lowest	Limited by loan-to-cost and loan-to-value, usually needs pre-sales
Mezzanine finance	Debt behind senior, ahead of equity	Higher	Needs senior lender consent; lifts total gearing
Second mortgage	Loan secured on other property you hold	Moderate to high	Puts the other property at risk
Bridging finance	Short-term funding for a defined timing gap	High, but brief	Needs a clear, credible exit
Joint-venture or investor equity	Capital partner takes a share of profit	Highest in profit-share terms	No repayments, but shares upside
Developer cash	Your own money	Opportunity cost	Often needed first

The cost of each layer is best measured in dollars over the life of the project and as a share of the profit it protects. A mezzanine layer that costs $180k over twelve months is expensive in isolation, but sensible if it lets a $900k profit project proceed and the alternative is selling the site. For how lenders see the choice between structures, see development finance vs construction loan.

How do pre-sales and valuations decide the size of the gap?

Lenders often require a proportion of the project to be pre-sold, or a debt-cover test to be met, before they release construction funds. The pre-sale requirement protects them from a half-finished building with no buyers. The valuation protects them from lending against an optimistic estimate of the end value. Both are outside your control once a valuer has attended.

That makes them the most dangerous swing factors in your funding plan. A valuation $300k below your feasibility lowers the senior loan and widens the gap by a similar amount. Pre-sales slower than planned can delay the first drawdown. A sensible plan tests the funding at a conservative valuation and slower sales, and shows lenders it still works. Our guide on how valuations work for business loans explains what the valuer looks at.

How does GST affect development cash?

GST on a development sale can be one of the largest single cash items on the project, and the margin scheme is a common tool. The ATO says that under the scheme, GST on a property sale is one-eleventh of the margin instead of one-eleventh of the full sale price. It is available to GST-registered sellers where the sale is part of the business, and the seller and buyer must agree in writing to use it on or before the supply, which in practice means before settlement. For property bought on or after 1 July 2000, the margin is generally the sale price less the purchase price. Development costs, legal fees and stamp duty are not deducted, which is why the scheme saves less than many developers first assume.

Here is why it matters for cash. Without the scheme, a $1.1 million sale carries GST of $100k that has to be paid over. With it, GST depends on how much of the price is margin. If you bought the land for $600k and sell for $1.1 million, the margin is $500k and the GST is about $45k. Settlement withholding and input credit timing then affect when each amount moves. Get your accountant to model it before you sign the sale contracts, because the written agreement has to be in place before settlement.

A worked example

This is an illustration only. A developer plans four townhouses on a site bought for $1.4 million. Construction and holding costs are $2.2 million, and expected gross sales are $4.4 million.

Item	Amount
Land	$1,400,000
Construction, fees, holding	$2,200,000
Total project cost	$3,600,000
Senior loan at 65% of cost	$2,340,000
Gap to fill	$1,260,000

The developer’s own money in the project is $900k, the cash part of the land purchase. That is less than the $1.26 million the senior lender expects, so a gap of about $360k remains.

The developer takes a short second mortgage of that amount over a family investment property, to be repaid from the first two settlements. It is cheaper than a full mezzanine tranche and quicker to arrange. The risk is that those two settlements slip, so the owner models a four-month delay and holds a reserve against it.

If you are building a stack like this, a one-minute enquiry is a sensible way to see which pieces we can help with.

What do lenders want in a development application?

A complete pack speeds every layer. Expect to provide:

• a feasibility study with realistic cost and sales assumptions;
• planning permit and approvals;
• a fixed-price build contract and a quantity surveyor’s report;
• pre-sale contracts or evidence of demand;
• your project history, including completed projects;
• a statement of assets and liabilities;
• insurance quotes, including construction and public liability;
• the proposed exit: sales, refinance or both.

Lenders are also aware that construction has topped ASIC’s industry insolvency tables for years, so they read developer cash planning closely. A buffer line for cost overruns, and a clear plan for delays, count for a lot.

What mistakes do developers make when planning funding?

• Treating valuation as a formality. It sets your senior debt, so stress-test it.
• Funding only to practical completion. Plan the settlement period too.
• Stacking layers without checking consent. Senior lenders often restrict secondary debt.
• Ignoring GST timing. Cash can leave before it comes in.
• No contingency. Cost overruns of 5% to 10% are common enough to plan for.

Planning the funding for your next project?

If your numbers show a gap and the senior lender cannot or will not close it, we can talk about what else fits, from second mortgage money to bridging and structure. Early conversations leave more room to choose than last-minute ones.

The enquiry takes about a minute, and your credit file is not touched when you make it. We do not spray your details across a list of lenders, so you will not be buried in calls. A real person looks at your project and phones you. Give us the cost, the senior loan and the exit as accurately as you can, so we can match the right option the first time.

Find out how to close your funding gap →