Presales & LVR in Development Finance | DeMarque

Every development lender runs the same qualification gates before a project gets near credit approval: how much of the cost they’ll fund, how much of the end value they’ll lend against, and how much of the project needs to be pre-sold or pre-committed before the first dollar moves. These gates — presale coverage, loan-to-cost, loan-to-value — are where most development finance applications actually succeed or fail. A project can be profitable, well-located and well-designed and still be declined, because the gates test something different from quality: they test how much risk the lender is carrying if things go wrong.

Here’s how each gate works, and why “fundable on paper” and “fundable” aren’t the same thing.

Presales: De-Risking the Exit Before It Exists

A presale is a binding contract to buy a unit or lot before completion. To a lender, presales answer the question that matters most on a residential development: who is going to repay this loan? A facility repaid from settlements needs those settlements to be real — signed, exchanged, deposit-backed contracts to arm’s-length buyers.

Presale requirements are usually expressed as debt coverage — the value of qualifying presales relative to the facility — rather than a share of the units. What counts as “qualifying” is where projects come unstuck. Lenders typically discount or exclude: sales to related parties; multiple sales to a single buyer; contracts with long or conditional settlement terms; sales with rebates or incentives that flatter the headline price; and foreign-buyer contracts beyond certain concentrations, given settlement risk. Ten presales on paper can be six after the lender’s filter.

Requirements vary widely by lender type. Banks generally sit at the conservative end of presale coverage; private and non-bank development funders will fund with reduced — sometimes zero — presales, pricing the additional risk accordingly. Commercial and industrial projects substitute precommitments (agreements for lease, tenant covenants) for presales, and pure residual-stock or build-to-hold strategies are assessed on the sponsor’s capacity to hold, not sell.

DMF Insight: Presales are a currency, and lenders set the exchange rate. Before committing marketing spend to “get the presales up”, find out which contracts your target lender will actually count — a smaller number of clean, unconditional, arm’s-length sales is worth more than a bigger number that dissolves under the qualifying filter.

Loan-to-Cost vs Loan-to-Value: Two Ceilings, Both Apply

Development leverage is capped two ways at once:

• Loan-to-cost (LCR / LTC) — the facility as a share of total development cost. This gate forces the developer to have genuine equity in the project: the lender funds a portion of the cost, and the sponsor’s contribution — land equity, cash, or both — covers the rest, usually going in first.

• Loan-to-value (LVR) — the facility as a share of value, typically the gross realisation value (GRV) of the completed project (net of GST and sometimes selling costs), or the on-completion valuation for a single asset.

The facility must sit under both ceilings, and whichever bites first sets the loan. A high-margin project hits the cost ceiling (the loan can’t exceed the LTC cap even though the end value would support more); a thin-margin project hits the value ceiling. That interaction is deliberate: together, the two caps ensure there’s both sponsor skin in the game and an equity buffer in the completed asset.

Actual caps vary by lender, project type, location and sponsor track record — bank appetite, non-bank appetite and private credit sit at different points, and figures move with the market cycle. Any specific ratio belongs to a live lender conversation, not a blog post; what doesn’t change is the structure of the test.

Why “Fundable on Paper” Gets Declined

The recurring decline reasons in development finance sit behind the gates rather than in them:

• The feasibility doesn’t survive the lender’s rework. Credit teams rebuild the numbers with the QS’s cost estimate, conservative realisations and a longer program — a project that only works on the sponsor’s assumptions fails quietly at this step. (How that rework happens: construction finance costs and feasibility.)

• Presales don’t qualify. The coverage number is met, but the contracts don’t survive the filter.

• The equity isn’t liquid or isn’t first. Sponsor contribution that exists on paper but can’t be deployed before drawdowns start; most facilities sequence borrower equity in first — the mechanics are covered in construction loan drawdowns and progress payments.

• The builder fails due diligence. Capacity, track record, financials or licensing — the lender is underwriting the builder almost as much as the borrower.

• Sponsor experience doesn’t match the project’s scale. A first development is fundable; a first development that triples the sponsor’s largest previous project is a harder conversation, whatever the numbers say.

• The exit is asserted, not evidenced. “We’ll refinance at completion” or “the market will absorb the stock” without valuation support, presales or a term-debt pathway reads as hope, and lenders don’t fund hope.

Want to Know Which Gates Your Project Clears?

Use our 2-minute pre-assessment tool for a clearer view of the development funding options that may suit your project.

Start Your Free Pre-Assessment

Positioning a Project to Qualify

The practical sequence: establish which lender type fits the project’s risk profile (bank, non-bank, private) before shaping the deal; confirm what presale or precommitment evidence that lender will count, and gather it in qualifying form; present the feasibility with the lender’s own conservatism already applied; evidence the equity and its sequencing; and package the builder’s credentials with the application rather than waiting to be asked. Projects positioned this way don’t just pass the gates — they often unlock better leverage and pricing tiers, because the lender’s uncertainty premium falls away. The broader context lives on our construction and development finance page.

Final Thoughts

Presale coverage, loan-to-cost and loan-to-value are the three gates every development facility passes through, and they measure lender risk, not project quality. Understand what each gate is testing, know how your target lender counts presales and caps leverage, and put the evidence in qualifying form before applying — that’s the difference between a project that is fundable on paper and one that gets funded.

You may also want to read:

• Construction Finance Costs & Feasibility

• Construction Loan Drawdowns & Progress Payments

• Commercial Property Deposits & Equity: How Much Do You Actually Need?

This information is general in nature and does not constitute financial advice. Qualification requirements vary by lender, project and market conditions, and lending is subject to individual circumstances and lender criteria.

Need Help Qualifying a Development?

DeMarque Finance can test your project against the gates that matter, shape the presale and equity evidence, and match it to lenders whose appetite fits.

Discuss Your Scenario