Dear all,
Would aporeciate your kind inputs on the case study below. There are 2 parts to the question so please contribute any information or experiences you may have had.
1) I have purchased a piece of land worth $1million with the intent to develop a 10 unit apartment block (correct me if im wrong but this would have to fist pass zoning requirements and approvals from city council.) What would the banks lend me for construction? Would an architects plans and estimated terminal property value per unit affect my borrowing ability or would the collateral (purchased land) be used in the consideration for the loan?
2) Assuming the construction loan is granted and the project is completed with the apartment block of 10 units completed. Would the bank then be able to refinance the initial loan into one which more resembles individual mortgages taken out on the units? If this is the case, could interest only payments be made on the construction loan?
Thanks in advance
1. possiby up to 65% of end value
2. not sure what you are saying here/ once complete you could refinance into a cheaper loan product If individual titles then each title could have a separate loan – potentially a different bank and loan for each unit. IO is possible
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks Terry. On point 1, how does the bank assess 65% of completed value? Would a Development Approval and architects plans be sufficient submissions to the bank?
Benny
A lender would want a full fixed price contract, DA/BA, full plans and specifications and probably a QS report to provide to their valuer to undertake the valuation on the property.
Unless you have considerable development experience, several pre-sales or you can show that you can service the peak debt a standard Banking lender won’t touch it.
Also remember that GR loans are based on net GST value.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Yes, it is not easy Benny
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks guys, i guess that means back to the drawing block again for me as this may take up more money than i initially budgeted!
Hi Benny
There are a couple of ways that you can look at construction funding, either traditional bank funding or through “Private” lenders.
To answer your first question, when looking at construction funding a lender will consider two ratios:
1) % of Total Development Cost (TDC)
2) % of Gross Realisation (GR) (which as Richard pointed out would be exclusive of GST)Each bank has a different policy on these ranging from 70% to 80% of TDC or 60% to 70% of GR. They will lend to the lower of the two.
Private lenders on the other hand can stretch leverage to 85% of TDC if project is well located and stock is well priced.
To answer your 2nd question, I read as though your intention is to construct and retain the 10 units for longer term investment? Typically it is not easy to refinance completed stock with ‘home loan’ type products. Given the lower yield on residential property you would likely need to be able to show a significant level of external income to show sufficient servicing for a loan of this type.
The issue of presales was also brought up, again your borrowing strategy will dictate what is required in this regard. For bank funding you would likely need to be able to show at least 50% cover of your debt limit with net proceeds from presales. Private lenders on the other hand will look at wearing the market risk and fund a project without presales should the stock been seen as readily marketable.
Presales help reduce the risk to the developer as well as the lender however the advantage of funding without presales is that it allows the developer to commence the project sooner and save on holding costs, reduce upfront marketing costs and potentially achieve a higher price for their product given buyers are able to “touch and feel” rather than buy off the plan.
Obviously private lending is a more expensive form of finance than that available from banks but can work for the right project.
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Cheers
RhysRhys Adams
http://www.redcommercial.com.au/
Email Me | Phone MeCommercial Property and Construction Finance Specialist
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