Scenario: unsold units after construction finance

This walk-through uses a hypothetical mid-sized developer to show the choices that arise when completed dwellings are slow to sell. The project, the lender and the numbers are not real. Use the Privet tools linked on this page to model your own position.

Where the developer stands

The hypothetical developer has just reached practical completion on a small apartment building. Most of the off-the-plan contracts have settled, and those settlements have paid down a large share of the construction facility. A handful of apartments, mostly the larger ones on the upper floors, never sold during construction and are still on the market.

The construction loan expires a short time after completion. The remaining balance includes capitalised interest, and the lender will not keep the facility open indefinitely. The developer needs to decide how to deal with the remaining debt before that date, and what to do with the unsold apartments.

Why the facility falling due matters

A construction lender is set up to fund a build, not to hold finished stock. Its facility usually allows a short sell-down window after completion and then expects repayment. If the debt is not cleared or refinanced by expiry, the loan may move into default, with default interest and, in time, the possibility of enforcement. Developers in this position generally have more room to negotiate when they approach the lender early, with a written plan, rather than at the last minute.

The main paths

A residual stock loan

The most common response is to refinance the leftover debt with a residual stock loan, secured over the unsold apartments. This clears the construction facility and gives the developer a further period to sell.

A residual stock lender will typically look at:

• A current valuation of each unsold apartment from a valuer the lender instructs.
• Evidence of recent sales in the building and nearby, including any discounts or incentives given.
• How long the units have been listed and the agent's marketing plan.
• The release price for each unit, meaning the amount the lender takes from each sale.
• The developer's other assets and any personal guarantees.

Expect fees, valuation and legal costs on the new loan, plus discharge costs on the old one. The loan cost estimator can total these from an offer you hold.

Extending the construction facility

Some construction lenders will agree to a short extension if the remaining debt is small relative to the stock and sales are progressing. An extension is not automatic. It may require a fee, updated valuations and a sales schedule, and the interest rate may change.

Selling down faster

The developer could reduce asking prices, offer incentives, run an auction campaign or approach investors about buying several units together. A faster sale reduces holding costs and interest, but lower prices mean less left after repaying the debt. Discounts can also affect how valuers treat the remaining units, so it pays to think about the sequence.

Holding and leasing some stock

A developer who believes the market will recover may lease some apartments and refinance them to a longer-term investment loan. Lenders then focus on rental income, serviceability and the borrower's broader position. This path has tax consequences, discussed below.

GST on the sale of new residential units

New residential premises are generally subject to GST when sold by a developer registered for GST. That GST comes out of the sale price, so it reduces the net proceeds available to repay any lender.

The GST margin scheme may allow GST to be calculated on the margin rather than the full sale price, where the project meets the eligibility rules. Under the scheme, GST is generally the margin divided by 11^[1]. The seller and buyer generally need to agree in writing to apply it, so the decision usually needs to be made before contracts are issued. The ATO explains the rules on its margin scheme page.

Buyers of new residential premises are generally required to withhold an amount for GST at settlement and pay it straight to the ATO. That means the developer receives less cash at settlement than the contract price suggests, which matters when calculating whether each sale clears its release price. See the ATO's guidance on GST at settlement.

Leasing new apartments instead of selling them can change the GST position too. Residential rent is generally input taxed, which may mean adjusting GST credits claimed during construction. This is an area where a tax adviser's input is worth getting before choosing a path.

Modelling the choices in Privet's tools

1. Open the GST margin scheme calculator and enter your own sale price and margin details for a typical unsold unit. Compare GST under the margin scheme with GST on the full price, then note the net amount per sale.
2. Compare each net amount with the lender's release price to see how quickly sales would retire the debt.
3. Use the exit timeline planner to work back from the facility's expiry. Enter the time you expect for listing, exchange and settlement, and see whether a residual stock loan or an extension needs to be in place first.
4. Test slower sales and lower prices. Results are estimates only.

The margin scheme lesson explains the concept in more depth.

Where things can go wrong

• Valuation comes in low. A residual stock lender may advance less than the remaining debt, leaving a gap the developer must fund.
• Release prices are set high. Each sale may need to clear a large amount, which can stall sales if prices fall.
• GST is overlooked. Net proceeds after GST withholding can be noticeably lower than headline prices.
• Defects surface. Issues raised by early buyers during the defects liability period can affect marketing and valuations.

Questions to ask lenders and advisers

1. When exactly does the construction facility expire, and would the lender consider an extension?
2. How would a residual stock lender value the unsold units, and what release prices would it set?
3. What fees apply to discharging the construction loan and establishing a new one?
4. Is the margin scheme available for this project, and has it been documented correctly in the contracts?
5. What are the GST and income tax effects of leasing rather than selling?

This page is general information only. It is not tax, legal or financial advice.