Hi
I have just completed a 4 Townhouse development in Brisbane which turned out to be successful. After making a few other investments I have 500K left in my company bank account. The development was completed under my development company and 1.5 Million was borrowed capitalised and repaid within 12 months, I have now started looking for my next project in Sydney as that's where I currently live . I am now fully self employed and am doing developments full time. The problem that has arisen now however is that I found another residential block with an approved DA for subdivision into 2 lots, the existing house is well positioned on the block and will be easily renovated and then a new house built on the battle axe block and both sold off.
I have approached my finance broker who went down the process of trying to get a loan for 80% of the purchase price as I am putting up the 20% deposit, however to my shock I have been getting refused by almost all lenders. I am only after the funding for the purchase of the house and land and will be funding the project from there myself. The valuations have staked up and the feasibility is working to make very close to 20% across the total development proposal (Land and Construction cost) which is about 150K + and I would be able to roll it over within 12 months or less.
The answers coming back from the lenders is that they don't want to do a short term residential loan to a development company and then try to push me off to a commercial product but then its to small for a commercial product as not a min of 4 townhouses. At the end of the day I want to buy a block of land with a house on it. A straight residential purchase as done a million times a year by people wanting to have the mortgage for 25 – 30 years but because I am a development company and will be selling the property on within 12 months they don't have a product that will return them enough in interest and fees for the risk of lending to a development company for 12 months unless its for more than 1 million dollars and a 3% higher interest rate. The other catch is that if I do get a standard residential home loan and sell it within the first 5 years the exit and termination fees will take a fair chunk out of my profits. There are also to many issues around GST , income tax and CGT to warrant doing in personal name.
So its easier for me to get a 1.5 million dollar commercial loan to build 4 -5 townhouses than it is to borrow 400 – 500 K to do a small residential subdivision and pay it back within 12 months.
the most frustrating thing is that I am missing out on these properties because the finance problem I am having, So does anyone have any solutions that will get me around this issue. If so please let me know what I may be missing it would be very helpful.
Don't tell them that you will be repaying the loan in 12 mths or get a 2nd tier lender or borrow bank with bills.
You cant blame the lender you want development finance at residential rates yet arent prepared to pay for it.
I have done 101 projects around Brisbane in the last 15 years everything from a 2 lot subdivision to 55 units at Nundah and have always found it is easier to be honest with the lender and accept the higher rate, fees etc so that the deal happens.
Quibbling over a percent here or there and an application fee will not build a reputation with any lender in the long term.
Richard Taylor | Australia's leading private lender
Hi Richard
I think I better clarify. I am not turning down the option to use a commercial product and pay the extra interest or fees, so sorry if that's what it sounded like in my post that's just the cost of doing business and I am fine with that. The issue is that the lenders are not offering it to me because of the size of the project. (2 lot subdivision). I am also being completely up front with exactly what I want to do as it's not that hard for them to work out anyway, and with the way sales contracts work in NSW you cannot write in a finance clause so your finance needs to be pre approved before exchanging contracts, you cannot risk trying to pull the wool over the lenders eyes or they will leave you high and dry with an unconditional contract when it comes to completion. Can you possibly let me in on who is currently lending in the current climate for this type of project or what product would be best for this size project ? Any help would be gratefully received.
You might have to try and find a money partner to get this project off the ground.
12 month term no DEF can be done! you just need to know where to look.
Hi Spicy,
You have had some good replys, but I am just wondering if you are doing a development of this size with the obvious goal to make money, why would you object to a comparatively trivial $750 -$1200 'early exit fee' for a residential loan (depending on the lender – as long as it is a 'major') Less rates then the commercial deal you cannot get, and a very small price to pay for what you want. Surely? I realize the 2nd tier and 'white label type lenders may charge a few grand, but the banks, or even a credit union charge a fraction of this to exit a variable rate residential home loan in the first 4 years – and it's deductible for investment & income producing purposes….
All the best.Hi v8ghia
Thank you for your reply. I realise that some of the exit fees are not to serious but the problem is not so much the exit fees its that they will not do the loan to my company, as it is pretty obvious that its a development company when they look at financials so they are shying away. I have even added guarantors with PAYG earnings to remove any concern of serviceability but still not coming to the party. They will lend to me in a personal capacity but then I lose the margin scheme for GST on the land purchase and get hit with CGT and higher income tax as supposed to 30% CT which makes the project unfeasible. If I was going to develop and hold this wouldn't be such a problem.
Thank you everyone who replied with ideas I will work something out eventually, you know what they say if it was easy everyone would be doing it.
heers
Spicy, all feasibilities should be calculated without the effect of tax taken into account. If the project stacks up pre-tax, then it will stand up with tax.
Thanks for that but the feasibility when operating under a company entity registered for GST makes it much more feasible tax wise than doing it in your personal name. I realise that I could do a joint venture with myself and my company but the profitability would considerably reduced as I would be taxed at the highest tax bracket of 47% as supposed to 30% and I would not be able to apply the GST Margin scheme which enables you to only pay GST on the margin of property cost price and final selling price which saves you a large amount of money. I do agree that the feasibility needs to be worked out ex tax to check its worth doing in the first place but you need to do some tax planning or you will be giving away much more than you should. And its way to hard to make to give it away again.
Is borrowing in your name an option (then on-lending to your company)?
I have been finding the issue is mainly one of semantics. In taking the deal to the financier, there is a definite shift in attitudes depending on whether the proposal is intended as an investment, or a development.
I'm not kidding here.
My own banker has said yes to an investment loan, and no to a development loan, for the same project. This seems to be an issue of risk profiling and exposure appetite for the banks. In plain terms there is money to lend for investing, but not for developing. This simple edict seems to find its way from the bank's strategy, right down to the bankers writing the business.
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