Providence Lending Group | Development Finance
6 min read
KEY POINTS
- Development finance presales are one of the primary ways a lender de-risks a project before releasing construction funding.
- The amount of presale cover required isn’t a fixed percentage — it moves with the loan-to-cost ratio, the buyer profile, and how much of the debt sits ahead of the developer’s own equity.
- Not all presale contracts carry the same weight with a lender — genuine, unconditional, arm’s-length contracts are treated very differently from reservations or related-party sales.
- GST withholding obligations apply to most new residential sales, which affects the net settlement proceeds a lender can actually rely on from a presold contract.
- This article explains the mechanics only. How much presale cover a specific project needs depends on individual circumstances, and we’re always happy to work through it with you and your lender.
Why development finance presales cover exists in the first place
Presales exist to answer a question a lender can’t otherwise verify before construction begins: will there be genuine buyer demand for the finished product, at the prices the feasibility assumes? Development finance presales convert that uncertainty into evidence — signed, exchanged contracts from buyers willing to commit ahead of completion — and that evidence materially changes how a lender views the project’s exit risk.
This is different from residential lending, where the security is an existing, valued asset. A development loan is secured against something that doesn’t exist yet at drawdown, and presales are one of the clearest signals a lender has that the eventual product will sell at the values the feasibility relies on.
How lenders decide how much presale cover is enough
There’s no universal number here, despite how often developers ask for one. A lender’s required presale cover moves with several factors together: the loan-to-cost ratio being funded, the strength of the developer’s own track record, the depth of the local market for the product type, and how exposed the lender’s own position is relative to the developer’s equity. A project funded at a lower loan-to-cost ratio, with an experienced developer and a proven product type, can sometimes proceed with materially less presale cover than a highly leveraged first-time project in an untested location.
Non-bank lenders have generally been more flexible on presale requirements than major banks in recent years, often willing to fund with lower or no presale cover in exchange for a lower loan-to-cost ratio or additional security — a trade-off worth understanding rather than assuming one lender type is simply easier across the board.
Presale cover isn’t a hurdle a project clears once — it’s one input a lender weighs against several others, and the mix that works for one project won’t necessarily work for the next.
Not all presale contracts carry the same weight
A lender assessing development finance presales looks past the headline number to the quality of what’s actually been exchanged. An unconditional contract from an arm’s-length buyer, with a genuine deposit paid and no unusual sunset or finance conditions, carries real weight. A related-party sale, a contract with an extended sunset clause, or a reservation that hasn’t proceeded to exchange carries far less — and an experienced credit team will typically discount or exclude these when calculating effective presale cover, regardless of how they’re presented in a sales summary.
This is one of the more common gaps between a developer’s own presale summary and a lender’s assessment of it. Getting ahead of that gap — by understanding which contracts will actually count before submitting an application — tends to produce a smoother approval process than finding out during due diligence.
Where GST withholding fits into the presale calculation
Since 1 July 2018, purchasers of new residential premises have generally been required to remit a GST withholding amount directly to the ATO at settlement, rather than paying the full contract price to the developer. The ATO’s guidance on GST at settlement sets out how this operates in detail. For development finance purposes, this matters because the net proceeds a lender can rely on from a presold contract at settlement are lower than the full contract price — a distinction that should be reflected in the feasibility and the lender’s own settlement cash flow modelling, not discovered at the point of settlement.
What happens if presale targets aren’t met
Presale conditions attached to a facility are usually tested at a specific point — often before construction funding is released, or before a facility is finalised. Falling short doesn’t automatically end a project, but it typically triggers a conversation about the options available: additional equity, a reduced loan-to-cost ratio, extended marketing time, or in some cases a switch to a lender with a different risk appetite. Understanding these fallback paths before they’re needed is far more useful than discovering them under time pressure.
The considerations that deserve weight
A few points are worth keeping in mind when planning around development finance presales:
- Presale cover requirements vary meaningfully between lenders and move with the loan-to-cost ratio, not just the project type.
- Contract quality matters as much as contract quantity — a smaller number of genuine, unconditional contracts often outweighs a larger number of weaker ones.
- GST withholding reduces the net settlement proceeds available from a presold contract, and this should be built into cash flow projections from the outset.
- Presale shortfalls have workable fallback paths, but they’re easier to navigate when anticipated in advance rather than managed reactively.
Understanding your position
For a developer planning a project’s capital stack, the useful exercise is engaging with the presale question early — understanding roughly what a target lender is likely to require, and what quality of contract will actually count, well before a marketing campaign begins. That alignment between the sales strategy and the lending requirement tends to save considerable time later in the process.
How much presale cover a specific project needs, and which lenders are likely to offer the most workable terms for the project’s risk profile, are questions we can work through with you — comparing requirements across our lending panel rather than assuming one standard applies everywhere.
Find out more about Development loans here.