Hi All!
I've been an avid reader of the forums and now I have a question which I can't seem to find the answer to… So I am hoping there is someone out there with some help and some facts.
I want to know how to do property developers finance their projects. By this I mean, getting finance for the entire project, including site acquisition, design/approval, construction and then selling etc.
Are there special types of loans that are offered for developers. E.g finance is approved for X amount and a repayment is not due until pre-determined time as nominated in the loan contract (i.e. once approval is obtained or construction is finished) – in the meantime interest is obviously accumulating. So by this I mean, there are no monthly repayments, but rather a lump sum repayment/margin call at a pre-determined date as agreed to in the loan contract? Do such loans exist?
If not, then how do property developers obtain finance?Its a question that currently is baffling me. Because I have met many young guys who are builders/work in construction and somehow they have the means to finance these types of projects (not that I am judging on their income/ or questioning their level of wealth), but rather I question how do they obtain the finance to do this. I wonder how they can finance a million dollar loan via monthly repayments, whilst they are the actual builder/developer, therefore they have no exact income (they are building their own project) and therefore it is not feasible that they can pay for a loan on a monthly repayment arrangement. This is where I am led to believe there must be other types of loans??? Like mentioned above – is there a loan where they don't need to make repayments until certain periods, or maybe just interest only repayments?
I understand the basics of loans through my own prop investment, but I assume for actual property development there must be a different process? Do the main four banks in Aus service/provide property development tailored loans?
Apart from those well cashed up developers, I assume it is difficult for developers that are just starting out to obtain finance for these types of projects. So how should they approach this topic to a bank – apart from walking into the bank wearing a suit – would one require a company name and business plan to sell yourself to the bank to get finance? Does the bank consider an application on income/current economical situation plus deposit etc, or on the potential benefits of the business plan/profit margin? Or both?
I understand that finance would depend on LVR/deposit, and also on the scale of the project and also if it is commercial/res.
So to make it more specific – I am only referring to residential and with a deposit that can range between 20-30%.
I am seriously stuck on this question. Is there anyone who can answer this for me???
Cheers people!
Development financing is a totally different ball game to your mum and dad investor funding.
I dont have enough room on this post to answer all of questions safe to say that in the current climate funding is a lot harder than it used to be for a variety of reasons.
One of the biggest issues is the reduction in the number of lenders offering such finance.
Non of the big 4 really involve themselves in Gross Realisation or End Value Finance so you are left to the specialised Banks and Financiers. Pre-sales are important as well as good net asset base.
All in all still doing a number of good sized deals for developers but track record is important as well as good understanding of the industry and its hurdles.
Richard Taylor | Australia's leading private lender
Thanks Richard for your advice.
So there does exist loans with Groos Realisation or End Value payment upon completion? Do they provide same type of interest/fixed interest etc.
It must be hard to obtain finance for a developer just starting out. What do they assess your application on?
I will be in touch to find out more info.
Thanks heaps!
sounds like you have a rough idea of how development finance works, most of your post is correct.
Generally a development loan is first obtained and then drawn down, (claimed) at various stages, eg: slab, frame etc..
There are no payments to be made during the course of the construction, BUT, the entire balance is due at a pre determined date.
The builder/ developer will usually be paying himself a supervision fee for his time spent running the job and should treat himself as a seperate entity to the development, just like any other contracter on the site. This is how he manages to maintain an income. He is still working for someone, his development company.You will also find there are often silent partners in developments that are helping with the finance, although it may appear the young builder is doing it all on his own. I was 29 and ran a $2.5m project just after getting my building licence, i got strange looks from people when i told them i was the developer and they probably wondered where i got the money, one even straight out didn't believe me and then mumbled something about "daddy's money" But i had a viable project, with a high profit margin and two good partners. So we got the finance after a while.
Experience helps alot, pre sales (difficult), and the ability to get the project through to permit stage before needing finance. This way the bank can get an expected end valuation from the stamped plans of the proposed project and apply their loan to value ratio and other tests.
As for what the bank wants to see, they want EVERYTHING! Anything you think might be relevant, they will ask for. I havn't applied for finance lately but hear it is more difficult for developments now.
Thanks Jazz77 for the comments!!!
So they are known as 'development loans' and funds are drawn down at various intervals of the process, with the repayment not due until the pre-determined interval.
Who did you use to finance your development project? Anyone that you can recommend in Aus/Syd? If you like, PM me and can have a more detailed discussion.
Also, what does 'pre sales' actually mean?
The ability to get the project through to approval stage without finance, may mean obtaining finance for the actual acquisition of the site via another loan (unless of course I already own it/under an existing loan etc), and then obtain a separate loan for the acutal development. Would this be feasible, or wouldn't i just be increasing my finance costs.
Would it be preferable to have the whole project (site acquisition, approval, construction, sell) under the one loan?
Thanks for your help Jazz!
hey jazz77
when u say "There are no payments to be made during the course of the construction" does that still mean the interest payments on the development loan have to be made? sorry if it sounds like a silly question.
Also what are the requirements to otaining a building licence? So for example would i need a building licence to construct 2 townhouses?
Thanks
roy
No with most development finance subject to equity interest can be capitalised to the end debt.
Richard Taylor | Australia's leading private lender
So does mean that you can borrow all the cost for subdivison and construction cost and then start to pay when the rental income is coming in? Or do you need to pay each month interest payments!
I am in a similar situation where I am just now looking at sudviding and building if possible.
Yes as long as there is enough fat in the deal then yes all costs can be covered.
Richard Taylor | Australia's leading private lender
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