Published
1 August 2025In recent years, there has been an increase in private lending for property developments. This has been driven in part by borrowers seeking alternative financing options as traditional financial institutions tighten their lending criteria. The number of private lenders has also increased as property developments offer high returns. Higher returns come with higher risks, but private lenders can mitigate these with careful planning and due diligence.
Mitigating risks
As a lender it is important to ensure that both the development and the borrower have the capacity and capability to repay the loan. There are several things that you can do to ensure the development you are looking to fund is feasible and the borrower can meet their obligations.
Always review a business plan for the property development so you can determine its viability. A robust business plan should include detail of the development and concept, detailed costings and projected revenue, feasibility studies, expected cashflow and estimated timelines. In addition to the business plan, information about pre-sales can help you assess demand for the development. Once the development has commenced, request regular updates so you can monitor your asset. This may include reports from the project manager, periodic cash flow updates, changes to feasibility studies and detail of additional pre-sales.
Viewing a portfolio of completed developments also enables you to assess the level of risk involved based on past performance. Coupled with information on how each development performed against budget and estimated timelines this can give you an indication of whether the borrower is likely to complete the development efficiently. If another property developer will be involved, also conduct your due diligence on their past performance to minimise the risk of increased construction costs or unexpected delays.
If the borrower is a business or joint venture, due diligence should also be performed on the key individuals involved in the transaction. This may include searching court records to determine if there is any history of disputes or insolvency.
When financing property, it is common to ask for collateral to secure the loan. This could be the property that is being financed or other assets as well, depending on the level of risk involved. Regardless of the type of asset, it is important to conduct your own due diligence to ensure others do not have a claim against the asset and its value is sufficient given the value of the loan. Depending on the type of asset this may include conducting a title search for property with the land registry or a search of the Personal Property Securities Register and obtaining an independent valuation.
One of the biggest risks related to property developments is the economic environment. Falling property values, an increase in the Reserve Bank of Australia’s cash rate and economic factors can affect demand for the property. While these risks cannot always be mitigated, conduct detailed market research to assess the potential success of the development. This may include looking at historical sales in the area, other comparable properties, zoning of the property, and of course the location. This research will help you assess whether demand for the property is strong and may withstand some economic turbulence.
Another way to mitigate risk is to request a guarantor to the loan. This is someone who will pay the debt if the borrower is unable to. If you do have a guarantor, it’s important to ensure that you include a Carruthers clause in the guarantor agreement. This will enable the lender to recover from the guarantor if a liquidator voids a payment made by the borrower as a preference claim.
Last, but certainly not least, seek to have priority over the property.
Taking priority
As the name suggests, a priority notice may give a lender priority if certain things happen to the financed property. A lender can ask the property owner to lodge a priority notice with the land registry to protect their interests for a period of time. In Victoria, a priority notice is active on the title for 60 days with the possibility to extend by 30 days.
Once lodged, the priority notice tells anyone who searches the land registry that the lender intends to lodge an interest in the property that will have priority over any other interest lodged.
A priority arrangement can also be agreed between you and the borrower in contract. A priority arrangement clarifies that your lending is given priority over other creditors if the borrower defaults on their loan or becomes insolvent. Priority clauses are common where more than one lender is involved in a transaction and can reduce the potential for disputes.
Case law also exists that may protect a lender’s interests if there is a conflict over which creditor takes priority. Generally, the first lender to register their interest on a property will have priority over the asset. However, there is a principle called marshalling that may enable other lenders to recover some or all of their funds from collateral held by other lenders with a higher priority.
While it is not always possible to avoid risks, with careful planning you can mitigate your risks and limit the possibility of dispute if something doesn’t go to plan when funding property developments.
Our experienced team can help you understand and mitigate the risks when financing a property development. For a confidential discussion, contact us today.
