Hi everyone!
This is my first post here but have been researching for a while! Great forum!
I am planning to begin my first development in Melbourne consisting of 3 townhouses (depending on land size). Something small to get involved and experience before jumping deep.
I have been researching for the past 5 months… and now want to finally get involved, as this is my 2011 new years resolution!
I am pretty familiar with the majority of the process but want to cover myself just in case with all of your expertise and opinions.
1. Finance – during which stage of development to obtain, how is it given and percentage that is given.
To my understanding, a local or private lender will provide up to 70%-75& of land and up to 100% of construction (with profit margin 20%+ etc) – on what criteria do they accept or decline finance? And what stage of the development will they provide it and how? Eg: For contruction, you'll need plans from the architect and building quotes etc… but what about finance for just the land? Any recommondation?2. Costs to be missed – costs that developers could possibly miss or miscalculate.
Such as – Interest on Finance
– Possibly unexpected construction costs etcAre there any main costs that could be easily missed? This is to ensure analysis for feasibility as accurate as possible. In saying that, are their any good recommondation for good feasibility software?
Any advice, tips or anything would be much appreciated and am very thankful in advance.
In terms of finance you can fund a 3 unit development with either a residential facility or a commercial facility. Residential is cheaper and you can potentially borrow more money if you can get it mortgage insured, but you have to meet servicing requirements for the peak debt and make monthly interest payments. Commercial lenders will lend you as a ballpark 80% of your costs, it is more expensive but you can capitalise interest and servicing is not such an issue because of this.
When you acquire the land, unless it already has permits I suggest you just use a residential facility, as it may take you 12 months before you are in a position to start building. If you go this way, once you have the permits and apply for contruction funding the valuer will value the land on a project specific basis, to do this they work back from the end value, minus costs and what they consider to be a suitable marging, what is left is the value of the project, the Project rleated site valuation. This will likely be considerably higher than the staright land value, and the uplift forms part of your contribution. If the project works, this is often sufficient to enable you to get 100% of contruction costs.
I hope this helps.
Regards
AlistairThanks for the explanation Alistair, I too am interested to understand the nuts & bolts of finance for development projects.
Adding to the discussion already can you (and/or others) confirm if my understanding is correct (many thanks in advance).
With commercial finance through the banks there are two basic options: either borrowing up to 80% of the total project costs (which includes land purchase price, soft costs and construction costs), OR borrowing around 65% of the Estimated end sale price of the project. Is this understanding correct?
So if you were going to apply for commercial finance for a block you’d already purchased and had gotten plans/permits for. Then working backwards the banks look at the project as:
End Sale Value of all units
– costs to develop
– margin of profit (looking min of 20%)
= Value of the project (ie value of the land).
You then compare this value of the land to the price you paid and there should be equity in there. It’s this equity that forms part of your contribution to the financing of the project & it can be enough to loan you 100% of the construction costs. If it’s not enough you’ll have to chip in more money.
Is this a correct understanding of things for that type of scenario?
If the project was for a larger development (say more than 3units) and the initial land acquisition price was quite expensive (making the use of residential finance difficult to obtain as serviceability issues on the loan would be tough), would a common approach be to use commercial finance for the whole project? If so would you submit the application for funding in one go or would you still apply for the purchase of the land first, then go away get the permits for the units done and come back and apply for the construction phase?
Thanks again for your time and comments,
JennyHi Jenny
I had pretty much the same questions as you have just mentioned last Friday but in regards to a unit trust structure with a corporate trustee. I have previously done some work with Alistair and he definitely knows his development finance. I would suggest maybe you get in contact with Alistair and he will be able to give you detailed answers to your questions in respect to your financial situation he definitely pointed me in the right direction.
From my understanding but you would have to get it confirmed you might have trouble getting commercial finance on land without plans and permits (DA) or the pricing on the finance might be too expensive to hold land. Commercial finance is around the 11% mark from what l have been told which might make your project unfeasible if it takes you 12 months to get a DA.
All the best with your project.
Regards Maurice
Cheers Maurice (and also glad my question the other week helped someone else! ).
Can anyone recommend a decent feasibility software to use?
i have heard of Estate master and Feastudy, are these acceptable? what is the going price for these?Hi Rover
I can definitely recommend estate master l use it all the time there are a few different modules. Great for feasilitiblites and great for cost to complete analysis. It is basically an excel spreadsheet on steriods and cost l think is in the $2000-3000 range per licence.
Regards Maurice
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