developing

Hi Alistair,

It appears what you are looking for is a mixture of debt and equity funding. The debt funding could be arranged from conventional sources such as banks etc on an LVR basis as a % of hard costs, total project costs (tpc) or gross realisation value (grv). This is what you would normally use as well as the required equity that you would put in up front.

Most of the equity you don't have could be injected by private funds. These are sometimes raised through solicitors and accountants who have clients willing to place funds in this matter and who usually secure their position by way of registered second mortgage. These funds will cost more – often 15% – 20% p.a. In reality these funds are more a form of mezzanine finance as the lenders still like a bit of 'hurt money' from the borrower – maybe 10%. Some individuals lend direct, for instance from their self managed superannuation fund (smsf). Sometimes you can get your financier to raise their lending level for a success fee and a slight rise in interest rate. I recently raised my LVR from my financier from 80% of tpc to 90% of tpc on a 20 townhouse project without using mezzanine finance. This was achieved with a 0.25% rise in interest and a success fee on completion of $15,000. 

Some commercial finance brokers who specialise in high end lending based on grv have access to private and institutional equity funding. Your senior debt funder would need to be comfortable with the second mortgage behind them – some are a bit funny about it. Some equity and debt funders work hand in hand and some are the same organisation. When the equity funder supplies all equity above the senior debt level supplied by the financier (no equity from you at all) they usually look for a quite high return from the interest rate on the equity or a lower interest rate in line with the mezzanine rate plus a profit share.  

You're not in that league yet but merchant banks such as Macquarie, some fund managers and property finance groups such as Ashe Morgan Winthrop can supply top shelf equity funding. 

I see your biggest problem to overcome is your inexperience. This plays a big part in borrowing development finance, particularly in regards to subordinate debt where the suppliers will be ranked behind the senior debt source and they would be highly exposed should things go pear shaped. An experienced developer is one way of a financier mitigating risk. In cases of an inexperienced developer they would decline to lend or insist on an experienced development manager to manage the project on behalf of the developer.   

Hi Alastair,

We've just bought an IP which we are going to renovate and sub-divide the block.  This is our first IP project done completely on 'other peoples money'. We expect it to be completed within 6 months (although the subdivision will take longer).  We wanted short term borrowing and approached some friends to become money partners.  They agreed and we got a solicitor to draw up a loan agreement contract which both side have to sign.  This is essential to protect both parties (especially if there is any other relationship between the parties ie if they are friends or relatives).

We initially approached a solicitor and were offered 66% at 8% pa. but due to the solicitors lack of professionalism and warnings by other professional that he had been 'struck off' twice and couldn't legally arrange the mortgage (we checked this independantly and found it to be true) we pulled out.  We approached a second tier lender and arranged an 80% mortgage at 9%.  Even building in the higher interest charges the deal still makes a great deal of money and we haven't had to put any money down.  We will manage the project and do some of the work but essentially we make the profit without any costs!!

Good luck in finding funding, there's plenty of it out there.  If you believe in yourself other people will believe in you.

regards John

Hi,

Sorry about the delay in replying to your last post.

We borrowed the 20% deposit from money partners.  This is a short term project so the cost of borrowing the additional money is a big factor in the profitability.

We have a spreadsheet that we plug the project financial figures into.  We factor in cost of sub-division, cost of reno, cost of borrowing and the likely return when we sell.  We try to over estimate the costs and under estimate the return.  If the deal is profitable with these figure then it should be even more profitable when we use real figures.

hi

i was wondering if you could recommend ( or anyone could recommend ) a computer programme ( spreadsheet ) for crunching the numbers on prospective development projects???

i have succesfully completed a few developments but would like to refine my skills in this area

cheers