Hi Alfresco

A bit of time has passed since you posted your questions but I thought I would answer nonetheless.

Some key concepts of ‘commercial’ development funding:

– Presales – banks will typically require a level of presales prior to funding construction. As a general rule net sale proceeds (sale prices less GST and selling costs) will need to cover say 50% of the debt limit. There are funding options without presales but in your question about the difference in this type of funding, this is a key consideration.

-Leverage – commercial construction funding works of two lending ratios, that of Gross Realisation (exclusive of GST) (GR) and of Total Development Costs (TDC). Again, each lender has different policy on this but typically lending is capped at the lower of 80% of TDC (this includes land value, construction costs, contingency, professional fees and interest provision) and 65% of GR.

– Loan term – 12 months compared to 30 year residential loan term. These facilities are set up to get the project built with repayment upon completion via sale of the completed stock or refinance to a longer term investment facility.

– Interest Rates – the way this is structured is usually driven by the loan size. For smaller development loans this can be a straight interest rate, say 6% to 7%. For larger loans this will be split between interest rate (charged on drawn balance) of say 4.5% and a line fee (charged on the loan limit) of say 2%.

– Interest – interest during construction is capitalised (added to loan balance) during construction rather than met monthly

– Other costs – valuation reports are more expensive, think $5,000 rather than $500 and you will likely also require a quantity surveyor to certify progress claims say $3,000 for upfront report and $1,000 per claim.

The above is just a very broad picture and each of these points can be dissected further. Let me know if the above raises any further questions.

Cheers
Rhys

Hi Shane

A private lender would be the place for what you are looking for (except for interest rate).

This sounds to be a pretty straight forward transaction where you could achieve the following loan terms:
– Interest rate – 10%
– LVR – the lower of 80% of Total Development Cost or 70% of Gross Realisation (excl. GST)

The higher cost of this style of funding has to be weighed up against the marketing costs of preselling, the potential “discount” required in selling off the plan and if you have a positive view on the market, locking in sales at today’s prices.

Personally I see a lot of borrowers initially baulk at the cost of this style of funding (especially when new to development and used to <5% home loan rates) but after reviewing their project feasibilities do see the sense in it.

I agree with your strategy of maximising borrowings to keep control of funds as a contingency. I am currently funding a project where there was an unexpected cost of $120k following soil tests. In this case the developer didn’t have ready access to cash so has been a bit of juggle and some uncomfortable phone calls since.

Good luck with it, I hope to see you keep us updated on your progress.

Feel free to post any further questions.

Cheers
Rhys

Hi Cheryl

There are a number of unknowns here so will try answer some questions in general terms:

Will the sale to the builder be considered presales for traditional funding? Generally no, the list of conditions for a sale to “qualify” for “traditional” funding is usually a couple of pages long. To quote directly from a Terms Sheet of one of the major banks – “No purchaser to acquire more than two units without our prior written consent”. This was obviously for a unit development but you get the idea – qualifying presales are typically limited to 2 per buyer to minimise settlement risk.

To structure with vendor finance the seller the seller will need a decent equity position in the property. Your debt funder will require 1st mortgage security over the property meaning the vendor will need to have sufficient equity to enable the repayment of their mortgagee with the funds you are able to raise. Without seeing a feasibility or knowing if and how the subdivision is planned to be staged it is hard to say what fudning will be availble from the 1st mortgagee but typically it won’t be much.

The vendor can then secure their position by a second mortgage which I can go on and on about the next round of challenges there. We have funded a few subdivisions in this structure but through “private” funders, not cheap but do take a commercial view on these funding arrangements.

Let me know if you have any more questions.

Cheers
Rhys

Hi Steve

Your project will be easily funded with or without presales.

Presales reduce the risk to the developer, not just the lender but I would go down the no presale path unless you have a negative view on the market as you’ll be able to achieve better sale prices marketing the completed product. At the proposed leverage you are proposing, the risk mitigated by presales is quite low.

Without knowing your financial position, assumed rent on the completed townhouses will sufficiently prove servicibility on the debt limit.

As far as where to go to get this funded…a finance broker would be a good first step. They will be able to provide advice on structuring, feasibility as well as funding options.

Cheers
Rhys

Hi BNS

Just another investment strategy for consideration given your objective of retirement in 15ish years would be commercial property.

$1m of equity combined with debt should provide capacity to invest in commercial/industrial property with a decent tennancy profile. Yielding +8%, lock in borrowings <5.50% and you have a positively geared property that will pay itself off by your targeted retirement age (plus provide extra cash flow along the way).

If I was to go down this path I would be looking for a property with a long lease to a single, strong tenant.

Cheers
Rhys

Hi Amelie

As long as the business and your partner can show sufficient income to show debt servicing and you have 30% equity to contribute to the purchase (plus costs) you should been in a position to finance the property.

Cheers
Rhys

Hi Amelie

Your solicitor would be able to provide the best advice but perhaps a trust structure where you are a beneficiary may work and provide you with some protection?

In what structure do you operate your business together?

You also need to be mindful of stamp duty ramifications for you to add your name on title down the track.

Where are you looking to buy?

Cheers
Rhys