Construction lending continues to offer attractive returns for investors – when managed prudently. While it’s true that construction loans carry inherent risks, at TierONE Capital, we believe these risks can be effectively mitigated through experience, discipline, and most importantly, active oversight throughout the life of the loan.
In this article, we outline the key risks associated with construction lending and explain how TierONE Capital sets itself apart through a proactive and hands-on approach – anchored by our expert Property Services Team.
Understanding the Risks in Construction Lending
The first step in managing risk, is understanding the risk. The following risks are associated with construction lending:
- Economic and Interest Rate Risk
Fluctuating interest rates and inflation can affect borrowing costs, development timelines, and ultimately the feasibility of a project.
- Construction Cost Risk
Labour shortages, material price volatility, and supply chain disruptions can cause delays and cost overruns that impact a borrower’s ability to complete the project or repay the loan.
- Project-Specific Risks
Delays in approvals, unexpected site conditions, or non-compliance with building codes can undermine project success and increase financial exposure.
- Market and Sector Risk
Oversupply in certain locations or weakening demand in specific sectors, like office or retail, can affect project viability and investor returns.
- Borrower Risk
A developer’s financial capacity, track record, and reliance on pre-sales or future funding rounds must be closely assessed before funds are advanced.
- Regulatory and Environmental Risks
Shifting planning laws, Environmental, Social, and Governance (ESG) requirements, or unexpected environmental constraints can slow projects and increase costs.
- Loan Structuring and Security Risks
High Loan to Value Ratios (LVRs) or insufficient collateral in the early stages can leave lenders exposed if a project stalls.
- Exit Risk
Projects that fail to refinance or achieve expected sales can jeopardise loan repayments and investor outcomes.
Why Construction Lending Still Makes Sense
Despite these risks, construction lending remains a valuable strategy for income-focused investors seeking strong, risk-adjusted returns. However, success relies on more than having a deal that looks good on paper, it depends on having the right people in place to actively manage and mitigate risk as it arises.
That’s where TierONE Capital excels.
The TierONE Capital Advantage – Our Property Services Team
One of TierONE Capital’s greatest strengths, and a key point of difference from other lenders, is our in-house Property Services Team. Comprised of highly experienced professionals with deep backgrounds in construction, engineering, development, and project management, this team is an essential part of our approach to managing construction risk.
Their Role Begins Before the Loan Is Approved
From the moment a construction loan is proposed, the Property Services Team works hand-in-hand with our Credit Team to assess:
- the building contract terms;
- development plans and design documentation;
- the construction program and timeline; and
- the capabilities, track record, and capacity of the proposed builder.
Their Role Continues Throughout the Life of the Loan
Once a loan is approved, the Property Services Team remains actively involved, closely monitoring the project’s progress by:
- conducting regular on-site inspections;
- reviewing each drawdown request;
- confirming the value and quality of completed works; and
- staying in direct contact with the builder and developer.
This team serves as TierONE Capital’s front line, enabling us to respond quickly and effectively if issues emerge. Risk mitigation is more than theoretical, it’s about boots on the ground, real-time oversight, and early intervention to prevent small issues from becoming major problems.
Our Broader Risk Mitigation Framework
In addition to our Property Services Team, TierONE Capital applies the following best-in-class risk controls:
- thorough due diligence on every borrower, project, and market;
- staged drawdowns tied to verified progress milestones;
- contingency buffers for cost overruns or delays;
- diversified loan portfolios across regions and sectors; and
- ESG and regulatory compliance as part of upfront loan structuring.
Investing with Confidence
Construction lending, when done properly, delivers strong, and consistent, returns. But it requires the right strategy and the right team. At TierONE Capital, we don’t just approve a loan and walk away. We stay close to every project from beginning to end, because protecting your capital is our top priority.
To learn more about our current construction loan opportunities and how we manage risk, log in to your Investor Portal or speak with the TierONE Capital team today.
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