Put and call option development site finance: funding the fee and the settlement

You’ve found a site, agreed a price with the owner and signed a put and call option. The seller gets certainty, you get time to chase the DA and the money. The catch: the option has an exercise window, and the funding rarely lines up with it neatly. That is the problem with put and call option development site finance, and it is easier to solve if you split it into three separate cash calls.

What are the three cash calls in a put and call option?

Most developers budget for the purchase price and forget the stages before it.

1. The option fee. Paid when you sign. It buys the right to buy, and it is usually not refundable if you walk away.
2. The holding period. Often 12 to 24 months of DA fees, consultants, surveys, legal costs, council contributions and interest on whatever you’ve borrowed so far.
3. Settlement on exercise. The full price, plus duty, legal fees and any GST on the supply, due on the date your contract sets.

A bank facility is typically designed around the third call, and only after the planning approval, a feasibility and some presales are in place. The first two are the gaps, and the exercise window can close before the bank is ready.

How do you fund the option fee and holding costs?

The fee and early costs are expenses against a site you don’t own yet, so there is nothing on that site to secure a loan against. That pushes you to use other security.

• Cash reserves or equity partners. The cleanest option if you have them.
• Property you already own. A first or second mortgage, or a caveat loan, over completed residential, commercial, industrial or vacant land you hold. Because this lender looks at that property’s equity, not the option site’s approvals, it can move while the DA is still pending. Our site deposit funding and pre-construction costs pages explain how that works.
• Seller or vendor terms. Occasionally the vendor will accept a smaller fee or stage payments. Worth a question, not a plan.

With a private loan, interest can be capitalised for up to 6 months, so there are no repayments in the early period while the planning is moving. Over a long option period, think about whether the term and exit still line up. Our total cost of a short-term loan guide shows how to compare structures without rates.

What does the duty on an option look like?

This is the part owners rarely budget for, and it varies by state. Using NSW as the worked reference, because Revenue NSW publishes its position clearly:

• Grant of a call option. Since 19 May 2022 ad valorem duty applies to the call option fee when the option is granted, and the fee includes GST if applicable. Revenue NSW states no duty is payable on a put option fee (Revenue NSW options page).
• On exercise. Duty is charged on the dutiable value of the land, which includes the option consideration. Duty paid on the grant is not credited against it.
• If you never exercise. Revenue NSW says a refund of duty will not be issued where the call option isn’t exercised.
• Deadlines. Duty on the land after exercise is payable within three months of the exercise date, and duty on a transfer, nomination or novation of the option also falls due within three months.
• Nominating a company. If you assign or nominate the option to a project entity, the transferee pays duty on the option’s dutiable value, and the later land duty is reduced by that amount only where the same transferee pays it.

Revenue NSW also looks closely at put and call structures set up mainly to defer duty, so use a solicitor who does this regularly. Other states differ, so verify the rule for your site with that state’s revenue office before you sign. The point for finance is simple: duty is a cash call too, and the money has to be there on the day.

How do you fund settlement when the option is exercised?

You have four realistic paths, and the order matters.

1. Developer or construction lender. The best long-term answer, but approval depends on the DA, costings and presales. If they’re in hand by exercise, great.
2. Bank purchase finance. Some banks will fund the land on its own, usually at a lower LVR and with conditions.
3. Equity partner or JV. Brings cash but also shares the margin.
4. A short property-secured bridge. Borrow against completed property you own to settle on time, then refinance to a developer lender once approvals and presales land.

The bridge is the one this site writes about. It isn’t cheap money, so it works when the exit is concrete: the developer lender is already in discussions, or the land can be sold or subdivided. Our guide to exit strategies for a short-term mortgage explains what a lender wants to see.

Illustrative example

Illustrative only. A small developer holds a call option over a site for a $2.4m price with a $60k fee. The DA is lodged but not yet determined, and the exercise date is in 10 weeks. The bank has said it will consider land finance only after approval. The developer owns a commercial unit worth about $1.8m with a modest bank loan behind it. A second mortgage over that unit raises the settlement deposit and the duty and legal costs, and the loan runs until the DA is approved and a developer lender takes out the land. If the DA fails, the exit is to sell the land, so the developer talks to the lender about that fallback at the start, not at the end.

What if the DA isn’t ready by the exercise date?

Options are often conditional on DA or finance, with a long-stop date. When the window nears and approvals aren’t through:

• Ask for an extension. Vendors often grant one for an extension fee, sometimes only a small one, because a failed deal costs them time too. Get it in writing and check what it does to duty.
• Check the condition wording. A subject-to-DA condition that ends before the DA does may leave you exposed to a put.
• Exercise and bridge. If you’re confident in the approval, settle with a bridge and plan the refinance.
• Walk away. If the numbers or the approval have moved, losing the fee may be cheaper than settling. Know the figure.

For a pre-commitment checklist, see our development site due diligence guide. If an approval clock is also ticking, read development approval about to lapse.

Does a caveat protect the option?

Developers commonly lodge a caveat on the title to protect their interest under the option, which warns others that someone has a claim on the land. It doesn’t fund anything, but it is part of the protection while you wait. Our guide on what a caveat on a property title is explains the mechanics. A lender whose security is over a different property isn’t affected by it.

What should you have lined up before you sign?

Run through this before the option is executed:

• The option fee, and the duty on it, in cash or committed funding.
• A holding-period budget that covers the full term, including contingency.
• A written view from a lender of what they’ll do at exercise, and when they will decide.
• A solicitor’s check of the exercise mechanics, the put trigger, any extension right and the duty position in your state.
• A back-up exit if the DA is refused or delayed.
• A plan for how PEXA settlement funds will be sourced and in what order. Our guide to what happens at settlement shows the sequence.

If you hold more than one property to draw on, the land bank loans page explains how larger holds are funded.

Is there a quicker way to see what’s possible?

If the fee, the costs or settlement are the gap, a property-secured loan may cover it. Check your options here and tell us what you own and when the exercise date falls.

Ready to lock down the funding before the clock runs out?

Options reward the developer who has the money ready on the day, not the one still waiting for approval. If you’d like a specialist to look at the property you hold and the date you’re working to, let’s get started.

Enquiring takes about 60 seconds, and your credit file isn’t touched just for asking. We don’t send your details to a pile of lenders, so your phone won’t light up: one direct lender sees your enquiry, and a real person reads your situation and calls you. Please fill in the form accurately, including the exercise date and what’s owing on your property, so we can match the right option first time.

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