Commercial construction loans differ from standard commercial property loans in one key way: the lender does not advance the full loan amount at settlement. Instead, the loan is drawn down in stages as the build progresses, with each drawdown released against verified progress on site. This article explains how the drawdown schedule actually works, the role of a quantity surveyor, and the cash flow planning that goes with it. For broader context, see commercial property finance.
Why construction lending uses progressive drawdown
The risk profile of a half-built commercial property is very different from a completed one. Mid-build, the lender security (the partially completed structure) is worth substantially less than the eventual finished asset. If construction stalls or the borrower defaults at the 60 per cent stage, the lender is left with an incomplete asset that is hard to value, hard to sell, and may require significant further investment to make finishable.
Progressive drawdown manages this risk by releasing loan funds only as construction value is added. If the build stalls at 60 per cent, the lender has only advanced approximately 60 per cent of the loan, so the loan-to-asset-value ratio remains controlled even mid-build.
The borrower receives funds in stages that align with construction milestones, which also has cash flow benefits: you only pay interest on what has actually been drawn, not on the full eventual loan amount.
Typical drawdown stages
For a standard commercial construction loan, the drawdown schedule usually follows the major construction milestones. The exact stages vary by lender and project but a common pattern:
**Stage 1: Land purchase and site preparation.** Funds released at settlement to acquire the land, plus initial preparation costs (clearing, surveys, soil testing). Typically 25 to 40 per cent of total loan.
**Stage 2: Slab and structure.** Released when foundations and structural elements are in place. Typically 15 to 20 per cent of loan.
**Stage 3: Lock-up.** Released when the building is enclosed (walls, roof, external doors and windows). Typically 15 to 20 per cent.
**Stage 4: Fit-out.** Released when interior work is substantially complete (services, finishes, fittings). Typically 15 to 20 per cent.
**Stage 5: Practical completion.** Final drawdown released when the building is practically complete and ready for occupation. Typically 5 to 15 per cent retained until this stage.
For larger projects, the schedule may have 8 to 12 stages with finer granularity. For smaller projects, 3 or 4 stages is more common.
The quantity surveyor role
A quantity surveyor (QS) is the independent third-party expert who verifies construction progress at each drawdown stage. The QS visits the site, assesses what work has actually been completed, compares it against the contract specification, and issues a progress certificate that the lender uses to release the next drawdown.
The QS is appointed at the start of the project and engaged by the lender (with the cost typically passed through to the borrower as part of the loan fees). For most construction loans, the QS visits monthly or per drawdown stage.
The QS role is not just signing off drawdowns. They also review the initial construction contract for completeness, assess cost contingencies, monitor for cost overruns, and flag any quality or specification concerns to the lender. For larger projects they are a critical risk-management role.
Interest during construction
Construction loan interest is typically capitalised during the build phase rather than paid monthly. This means interest accrues against the loan balance as you draw down, but you do not make cash repayments during construction. The build proceeds without the cash flow strain of monthly loan payments.
Once practical completion is reached and the project is income-generating (a sold-on-completion property, a tenanted commercial space, or refinanced into a long-term commercial loan), the loan switches to standard amortising repayments.
Capitalised interest needs to be factored into the total loan size at the start. On a 12-month construction loan at 9 per cent capitalised, the loan balance at end of construction is roughly 7 to 8 per cent higher than the original drawdown total. Lenders include the interest capitalisation in their loan-to-cost calculations.
Cash flow planning during a build
Even with a construction loan in place, the borrower still has cash flow demands during the build:
Builder progress payments. The drawdown happens after the QS verifies the work, but the builder typically wants payment soon after completing each milestone. There can be a 2 to 4 week timing gap between the builder issuing a claim and the drawdown landing in your account. Plan working capital for this gap.
Owner-supplied items. If you are supplying any items directly (fit-out, specialist equipment, soft furnishings), those costs sit outside the construction loan and need to be funded separately.
Holding costs. Council rates, insurance, site security, utilities. Modest individually but add up across a long build.
Cost overruns. The contingency in the original budget needs to be real, not optimistic. Builds running over budget by 10 to 15 per cent are common; the borrower funds the overrun unless the contract includes a fixed-price guarantee.
When construction loans become development finance
For larger commercial projects (multi-unit, mixed-use, large-scale redevelopment), construction financing usually sits alongside other capital sources (senior debt, mezzanine, equity) in a capital stack. At that scale the structure becomes development finance, which is a more complex category covered separately. See private lending for business for adjacent context.
Typical loan terms
For a standard commercial construction loan in Australia:
Loan-to-cost: 65 to 75 per cent (you fund 25 to 35 per cent of total project cost from your own equity).
Term: 12 to 24 months of construction, then converted or refinanced.
Rate: 8 to 13 per cent per annum during construction, capitalised.
Establishment fee: 0.75 to 2 per cent of loan amount.
Pre-sales or pre-leases. For larger or speculative projects, lenders often require 50 to 100 per cent pre-sales or pre-leases before any drawdown occurs.
Where to from here
We arrange commercial construction finance across our panel of bank and specialist construction lenders, including the quantity surveyor appointment and drawdown coordination. No fees to clients; the lender pays us when finance settles. Book a 20-minute brief to discuss your project.
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