Most development projects begin with a site that cannot yet be built on. The land may be zoned for a higher use, or sit in an area where the planning scheme supports more density, but until a development approval (DA) is granted it remains, in a lender's eyes, a parcel of land with potential. Funding that stage is a distinct type of finance, and it is assessed very differently from a construction loan.
This guide, prepared by Amar Alamar of Blended Ventures, explains how land and site acquisition finance works before approval in Queensland, how lenders view unapproved land, how facilities are sized and serviced, and what a developer can do to put a strong case to lenders.
Why land before approval is a separate risk
A construction lender funds a defined project with drawings, a cost plan, a builder and often presales. A land lender before approval has much less to work with. The planning outcome is uncertain, the timeframe is uncertain and the land usually earns little or no income while the application is prepared and assessed.
Lenders therefore treat pre DA land as one of the higher risk categories in property finance. The questions they ask focus on three things: what the land is worth today, how long the borrower expects to hold it and how the loan will be repaid if the approval takes longer than planned or does not arrive in the form expected.
Who lends on unapproved land
The major banks lend on unapproved land in limited circumstances, usually for established clients with strong balance sheets and other security. Many developers instead turn to the private credit market, where specialist funds and non-bank lenders have built products for site acquisition, planning periods and land banking.
Private lenders tend to move faster and accept a wider range of scenarios, such as sites bought on short settlements, sites with an existing building that will be demolished, or land held in a company or trust that is new to borrowing. Pricing is typically higher than bank finance, and terms are shorter. The guide How Private and Development Finance Works for Gold Coast and Queensland Projects sets out how this market fits with banks and other funders.
How lenders size a pre DA facility
Before approval, lenders usually lend against the as is value of the land, assessed by an independent valuer on its current zoning and permitted use. The valuer may note the development potential, but the value that matters for the loan is generally the market value today, not the value of an approved site or a completed project.
This is a common point of disappointment. A developer's feasibility may show a meaningful uplift once a DA is granted, but that uplift is not normally available as borrowing capacity until the approval is in hand. Loan to value ratios on unapproved land are also usually more conservative than on income producing property or approved sites, which means the developer's equity contribution at acquisition is often substantial.
Where the borrower owns other property, lenders may accept additional security to increase the facility or reduce the cash required. A second mortgage over another asset is one way this is done, as explained in Commercial Second Mortgages in Australia.
Servicing interest while the land earns nothing
Vacant land and sites awaiting redevelopment rarely produce enough income to meet interest payments. Private lenders deal with this in a few ways:
Prepaid interest, where interest for some or all of the term is deducted from the loan at settlement.
Capitalised interest, where interest is added to the balance and repaid at exit.
Serviced interest, where the borrower pays monthly from other income, which some lenders will accept with evidence of capacity.
Where interest is prepaid or capitalised, it uses part of the facility and reduces the amount available for the purchase price. The term also matters. Planning in Queensland can take longer than expected, particularly where an application is impact assessable, attracts submissions or goes to appeal. A facility that is too short for the realistic approval timeframe creates refinance pressure at the worst moment.
The approval pathway as part of the credit case
Because the approval is the event that unlocks value, lenders want to understand how the developer intends to get there. A well prepared application usually covers:
The current zoning and the relevant provisions of the local planning scheme.
Whether the proposal is code assessable or impact assessable, and the expected timeframe.
Advice from a town planner on the likely outcome and key risks.
Concept plans or a yield study showing what the site can accommodate.
Any pre lodgement meetings with council and the issues raised.
A lender that can see a credible, professionally supported pathway to approval will usually be more comfortable with the term and structure requested. A lender that sees only an aspiration will price for the uncertainty or decline.
Exit strategies for a land facility
Every land loan needs a defined exit. The most common is a refinance into a construction facility once the DA is granted, design is complete and the project is ready to start. The construction lender repays the land loan from its first advance, as described in Construction Finance in Queensland.
Other exits include selling the site with the benefit of approval, refinancing into a longer land facility while presales are secured, or bringing in a joint venture or preferred equity partner to fund the next stage. Lenders tend to favour borrowers who have considered a second exit in case the first one is delayed. When the construction facility is eventually sized, both cost and value tests will apply, as set out in Loan to Cost and Loan to Value.
What to prepare before approaching a lender
A developer seeking pre DA land finance can usually get a faster and clearer response by preparing:
The contract of sale, including the settlement date and any special conditions.
Town planning advice and any concept or yield study.
A preliminary feasibility for the intended project.
Details of the equity available for the purchase and its source.
Information on any additional security that could be offered.
A summary of the borrower's experience and the proposed project team.
The proposed term and exit, with a realistic allowance for planning timeframes.
The role of Blended Ventures
Blended Ventures is a finance brokering consultancy founded by Amar Alamar, working with property owners, investors, developers and business owners from the Gold Coast and Brisbane. It connects clients with private credit funds, non-bank lenders, banks and capital partners, and focuses on business, commercial and investment purpose finance.
For a site acquisition, each engagement starts with the contract, the planning pathway and the intended exit, so that the facility presented to lenders reflects the real timeframe to approval and the step into construction finance. More information is available at blendedventures.com.au.
Important information
This article is general information only. It is not financial, credit, legal or tax advice and does not take into account any person's objectives, financial situation or needs. Blended Ventures is a finance broker, not a lender. Any finance is subject to the relevant lender's assessment, credit criteria, security valuation and approval. Readers should obtain independent professional advice before acting.
Key questions
Can I borrow to buy a development site before it has a DA?
Yes, in many cases. Banks are often cautious with unapproved land, but private credit funds and non-bank lenders regularly provide land and site acquisition facilities before a development approval is granted. They assess the land on its current value and use, and they rely on a credible plan for approval and a clear exit, rather than on the future project.
Is a pre DA land loan sized on the value of the approved project?
Generally, no. Before approval, lenders usually size the facility against the as is value of the land in its current state and zoning. Any uplift that an approval might create is not normally counted, because the approval has not yet been granted and may come with conditions that change the yield.
How is interest handled on a land acquisition loan?
Land produces little or no income, so interest on a pre DA facility is often prepaid from the loan at settlement or capitalised to the balance. Where the site has an existing house or commercial tenant, lenders may take that income into account, but they rarely rely on it to service the debt in full.
What happens to the land loan once approval is granted?
The usual exit is a refinance into a construction facility, where the land loan is repaid from the first drawdown. Other exits include selling the approved site, refinancing into a longer land facility while presales are secured, or a joint venture with a capital partner.
Does Blended Ventures lend money for land acquisitions?
No. Blended Ventures is a finance brokering consultancy. It connects clients with private credit funds, non-bank lenders, banks and capital partners. Any land facility is provided by the relevant lender and is subject to that lender's assessment and approval.
Share this article
The right
conversation
changes things.
For advisory engagements, commercial opportunities and international collaboration, get in touch directly.
Start a conversation