Scenario: exiting a development site loan

This page follows a hypothetical small developer through a site loan exit. The developer, the site and the lender are invented to illustrate the decisions involved. Nothing here is a prediction of how any real lender would respond, and the figures that matter are your own, which you can enter in the Privet tools linked below.

The starting position

Our hypothetical developer bought a suburban block with plans for a handful of townhouses. The purchase was funded with a land loan from a non-bank lender, secured by a first mortgage over the site, with interest capitalised and a short term. The plan was to obtain a development approval, sign a building contract and refinance into construction finance before the land loan expired.

Part way through the term, the plan changed. Builder quotes came back well above the original budget, a joint venture partner withdrew, and recent sales of comparable townhouses nearby were softer than the developer had assumed. The project margin that looked comfortable at purchase now looks thin. Meanwhile, the land loan's expiry date has not moved.

Why a land loan needs a clear exit

A site acquisition loan is lent on the strength of an exit. The lender generally expects to be repaid by a sale or by a construction lender taking over, not from the borrower's income. When the plan wobbles, the lender's main concern is whether that exit is still credible and whether its security still covers the growing balance.

Capitalised interest matters here. Each month the balance rises while the site produces no income. Land tax, council rates, insurance and consultant invoices also continue. A pause to "wait and see" is rarely free, so the developer's first task is to put a date on each option and cost the time it takes.

Option one: sell the site as it stands

Selling the block without an approval is usually the fastest route. The buyer pool is mainly other developers and builders, who will price the site using their own feasibility and their own view of what the council is likely to permit.

Points the developer would weigh:

• The price is likely to reflect the as-is value, not the value of a finished project.
• Agent fees, legal costs and any exit fee under the loan reduce what is left after repaying the lender.
• Settlement must occur before the loan expires, so the campaign length and settlement period need to fit inside the remaining term.
• Depending on how the site was held and used, the sale may have GST or income tax consequences, so tax advice before signing a contract is sensible.

Option two: obtain the approval, then sell

If an application is well advanced, the developer may prefer to finish the planning process and sell a site with a development approval in place. Some buyers will pay more for the reduced planning risk. Others will discount an approval for a design they would not build.

The trade-off is time. Councils set their own assessment timeframes, objections can add months, and conditions of consent may add cost. The land loan may need to be extended to cover this period, and an extension is generally at the lender's discretion and may carry an extension fee and a fresh valuation. Some developers look at pre-development and DA funding to cover consultant costs during this stage, which adds another layer of cost to model.

Approvals also tend to lapse if work does not start within the period the consent allows. Check the lapsing rules with the council or a planning lawyer, because they affect how attractive the approval is to a buyer.

Option three: refinance into construction finance

If the developer still believes in the project, the third path is to secure construction finance that repays the land loan at financial close and funds the build. This is the original plan, but it now has to work with higher costs and softer end values.

A construction lender would generally want:

1. The approval and endorsed plans.
2. A signed building contract and a builder whose licence, insurances and finances it can review.
3. A budget checked by its quantity surveyor, including a realistic contingency.
4. A feasibility study showing an acceptable margin under its own assumptions.
5. Equity, often contributed before its funds are drawn, which may now need to be larger because costs rose.
6. In some cases, a level of pre-sales.

If the gap between the new cost and the available loan cannot be filled, a refinance may not be possible on terms that leave the project viable. Mezzanine debt or a new equity partner are sometimes considered, but each reduces the developer's share of any profit and must be agreed with the senior lender.

Comparing the options in the tools

Rather than relying on a single headline number, the developer would run each path through the feasibility calculator. For the build option, they enter their updated costs, end values and finance terms and look at the margin and residual land value. For the sale options, the residual land value gives a rough sense of what a developer buyer might pay, which can be compared with the outstanding debt.

Next, the exit timeline planner works back from the land loan's expiry. The developer enters the expected time to list, exchange and settle a sale, or to reach financial close on a construction facility, and sees whether each path fits inside the remaining term or needs an extension. The LVR and loan-to-cost calculator helps show how a new lender might view the debt against cost and value. All results are estimates, not quotes.

What can go wrong

• The valuation falls. A lower assessed value can reduce what a construction lender will advance or prompt the land lender to ask for a paydown before extending.
• The sale takes longer than planned. A contract that settles after expiry does not repay the lender on time.
• Holding costs are underestimated. Interest, land tax and consultant fees compound the shortfall each month.
• Default. If the loan expires without an exit or extension, default interest and enforcement action may follow. The default and enforcement lesson explains how that process generally works.

Questions to ask before deciding

1. How much time remains on the land loan, and what would an extension require?
2. What is the site worth as it stands, and with an approval, according to a valuer the lender instructs?
3. Are there exit fees or break costs on early repayment?
4. Would a construction lender accept the revised budget and equity position?
5. What are the GST, income tax and land tax consequences of each path? Ask an accountant.

For a broader look at planning repayment, read exit strategies and backup exits. This scenario is general information only and not financial, legal or tax advice.