When a lender or broker talks about how a loan is structured, they mean the terms and mechanics that determine how the facility works in practice. This includes the facility limit, purpose, security, drawdown conditions, interest and fees, repayment profile, leverage tests, covenants and exit.
For property developers, structure can matter as much as the headline rate. Two facilities with the same nominal rate can produce different total costs, cash-flow demands and execution risks once drawdown timing, fees, interest treatment and repayment conditions are modelled. This guide explains the main components of development finance and how they interact.
What does loan structure mean?
Loan structure is the combined design of a facility: who borrows, what security is provided, how much can be drawn and when, how interest and fees are calculated, what conditions apply, and how and when the debt must be repaid.
Two loans with the same interest rate can produce very different outcomes. The charging base, drawdown profile, term, fees, covenants, prepayment and extension provisions, leverage limits and exit all affect the practical cost and risk.
What is a structured loan?
In this article, a structured loan means a facility tailored to a specific transaction rather than a standard retail product. It should not be confused with structured finance products such as securitisations or derivatives. In development and bridging finance, the tailored terms may reflect the acquisition timeline, construction programme, GST, staged drawdowns or releases, expected sales receipts and exit strategy.
How is a development loan structured?
A development funding structure may combine developer equity and senior debt. Where the senior lender permits it, subordinated debt or preferred equity may sit behind the senior facility. The senior lender usually holds first-ranking security and may fund land, approved project costs and capitalised interest. Mezzanine or second-ranking debt can reduce the developer’s new cash contribution, but it requires senior-lender consent and increases funding cost, leverage and intercreditor or coordination risk.
Interest is often capitalised rather than paid monthly, meaning it is added to the facility balance or drawn from an interest reserve and repaid at exit. This supports project cash flow, but increases the amount due at repayment. Depending on the borrower and project, interest may instead be paid monthly or partly capitalised. Our guide to loan repayment structures explains the main options.
Pricing may include interest on the drawn balance, an establishment fee, and a line or commitment fee calculated on the total facility or undrawn portion. Extension, drawdown, valuation, quantity surveyor and legal costs may also apply. These charges are not interchangeable. Construction drawdowns are usually staged and subject to agreed evidence and cost-to-complete controls, which may include invoices, inspections or quantity surveyor reporting.
Key structural components that affect cost and risk
Capitalised versus paid-monthly interest
Interest can be capitalised into the facility or paid monthly from the borrower’s cash flow. Capitalised interest preserves cash during construction, but increases peak debt and the total amount due at exit. Paying interest monthly prevents the interest charge from being added to the balance, but requires cash flow from another source. It does not keep the overall loan balance flat because construction drawdowns may continue.
Line fee and interest charging basis
Interest and a line fee are different charges. Interest is generally charged on the drawn balance, while a line fee may be charged on the total facility limit or the undrawn commitment. A facility can include both. Total cost depends on the rates, charging bases, drawdown profile and term, so neither should be compared in isolation.
LVR versus loan-to-cost
Loan-to-value ratio (LVR) compares debt or the facility limit with the supportable value of the security, which may be assessed on an as-is and/or as-if-complete basis. Loan-to-cost (LTC) compares debt with the approved total development cost. Lenders often apply both metrics, alongside cost-to-complete and other tests, but the binding constraint depends on the facility. Understanding how loan-to-cost ratios work is important when comparing quotes.
Fixed versus floating rate
Rates may be fixed or floating. A floating rate may reference BKBM or another base rate plus a margin, while a fixed rate provides pricing certainty for the agreed period. The term sheet should state the benchmark, reset frequency, margin and any default or extension pricing. Practice varies across banks and non-bank lenders.
Why loan structure matters as much as the headline rate
Two development facilities with the same nominal rate can produce different total costs, cash requirements and execution risks once the full structure is considered.
A line fee on the full facility may add more cost than the same line-fee rate applied only to the undrawn commitment, but the total outcome depends on all pricing terms. Capitalised interest may improve cash flow during construction, but it usually increases peak debt and the amount payable at exit compared with paying interest monthly. The preferred structure should be tested against the project’s actual drawdown and exit assumptions.
When comparing quotes, model the facility limit, initial advance, drawdown schedule, interest and fees, term, extension and prepayment provisions, covenants and exit. That gives a more reliable view than the headline rate alone.
Talk to ASAP Finance about your loan structure
At ASAP Finance, we structure development and construction loans around the project, borrower, security, drawdown programme and exit. If you are comparing a quote, assess the total cost, cash-flow impact, conditions and execution risk as well as the rate. Get in touch with the team at ASAP Finance to discuss how a facility could be structured for your project.