Hi,
My family and i are in the process of purchasing 4 adjacent lots in sydney and have spoken to coucil through a town planner about developing a 50-60 unit residential complex on the combined site. We are crunching some numbers and doing our feasibilty however i just wanted some input regarding the finance side. Our return profit margin is around 20% which is good, but my concern is the interest component on the construction cost. I understand this gets capitalized onto the balance of the loan, and everything gets restructured when OC is granted and settlement occurs, but can anyone tell me how the interest is calculated and totalled over the phase of construction, so i can calculate is value correctly. is it monthly? when are the progress payments made? etc etc. It is estimated the construction cost could be $14M. If anyone can let me know that would be appreciated. Anyone that has a similar example that they can share would be highly appreciated. Even sample feasibility would be a help.
Ray
Is that 20% profit AFTER interest is paid?
Yes. However I ask this question because I would like to know if our calculations for the interest value we have used are correct or not.
P.S estimated construction time has been considered at 24 months. And interest rate at 10% for a worst case scenario.
Ray
Hi Ray
Without any details on the project it is difficult to calculate the interest component or indeed the rate charged.
To be honest 10% maybe too cheap if it is a fairly high lvr and Mezz finance is involved (You could almost double that).
Interest will only be capitalised if you have pre-sales or can demonstrate that you can support the end debt, have prior experience and the rolled up interest is within the maximum LVR.
Very simply interest is charged on a daily basis and credited to the ongoing principal balance.
As long as it is not your first project and you have good asset backing the deal can be done.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
For a 50-60 units development in Sydney, I am assuming middle range apartments (mix of 1, 2 bedders + a few 3 bedders) with 2 levels basement carpark + 5 to 7 levels residential. If that is the case, you can allow 70 weeks construction period (Excl. design & tender period) and estimate cost approx. $15m to 18m. Of course its all depends on the ground condition and how efficiency of your design.
Sorry no help on finance side.
cheers.Appreciate the comments. Richard, thanks for your response. I have already spoken to a few lenders but just briefly over the phone. Pre-sales are a must which is not a problem. and this is our first project but we work in the construction industry so the lenders werent to fussed about the issue and they were the ones hinting at an 8.5-11% rate. As mentioned above, we are basing the construction phase at 24 months to be safe and we know based on builders quotes, coucil cost, legals, contingency's and professional costs etc the total construction aspect will be $14M. Land cost and interest on the land is not an issue so forget that. What i am really after is, when the progress payments are drawn over say a 24 month schedule, ie month 0 then 6, 12, 18 or something different? Unless i know this i can't calculate the interest component accurately.
Ray
Ray sorry i dont think you are understanding the process at all.
The progress payments will be set by you the Builder.
Assume you are at Slab stage you will notify the lender they will undertake a valuation and maybe a QS check and release the appropriate funds. It wont matter if this is month 1 or 3 as interest you will just be charged accordingly.
You as the Builder will understand the construction time and can plot the stage times according to the progress you are making.
They are no set dates for the progress draws as this will be determined by the project progress.Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
raymond123 wrote:Appreciate the comments. Richard, thanks for your response. I have already spoken to a few lenders but just briefly over the phone. Pre-sales are a must which is not a problem. and this is our first project but we work in the construction industry so the lenders werent to fussed about the issue and they were the ones hinting at an 8.5-11% rate. As mentioned above, we are basing the construction phase at 24 months to be safe and we know based on builders quotes, coucil cost, legals, contingency's and professional costs etc the total construction aspect will be $14M. Land cost and interest on the land is not an issue so forget that. What i am really after is, when the progress payments are drawn over say a 24 month schedule, ie month 0 then 6, 12, 18 or something different? Unless i know this i can't calculate the interest component accurately.Ray
Hi Ray,
There are a number of different ways of funding development projects such as this. With the banks you will get up to 80% of costs rates will likely be around 3% over the 90 day bill rate, but they will also charge a Line Fee on the undrawn potion of the funds, which will likely be around 2% against the undrawn portion of the loan. Non banks are much more expensive for loans this size on headline interest rate, but will unlikely charge as much on the undrawn portion which reduces the differential to some extent.
Presales are obviously another issue, you could be asked for as much as 120% debt coverage by some lenders, and as little as 75%. If the project is sufficiently strong then you could possibly get it done with no presales through a private funder, but this would be expensive. It shoukld be noted that for smaller contruction projectas you can get funding with no presales for only a small premium on the price, but for $14 mill contruction your options in this aerea aere fairly limited.
When the drawdowns happen will be heavily dependenrt on the contract you negotiate with the builder.
Regards
AlistairAlistair my sentiments exactly.
Ray seems to think that his local lender will approve the loan without any prior experience and that pre-sales are not a problem (might have to get him to market some of our projects) given that he is in the construction industry so all good there !!
Must admit 8.5% seems like a jolly good rate for a first timer.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hey guys thanks for the replies. Just to clarify, We do work in the construction industry, but this project will not be built by us. We are just acting as the developers. We have an independent builder taking on all aspects of construction not us. All the information i am giving you is straight from the lenders mouth. i am not making this up or trying to interpret it. Like i said, "presales are a must" so we are aware of the need for presales. I didnt say we dont need pre sales. This is no issue for us, because the department of housing has an interest to pre purchase 80% of the units. In regards to the progress payments, i know how the claim process is from a builders perspective, as i work in the industry. However, due to the scale of the project, i have seen in similar situations sometimes a starting payment. Also, the lenders have been telling me the progress payments are structured in a specific way. This structure is what i am after. Also i am curious if the lenders terms suspersede the builders or if this is mutually agreed upon based on different projects. I appreciate the input regarding rates, percentage of funding, presales and the process etc. But those are not issues i need help with. Those have already been addressed. My question is ONLY based on the calculation of the interest. Perhaps, let me word it like this. Forgetting presales and the percentage of costs that is being funded, a construction loan has been approved. The project begins, takes 24 months, and the interest rate is fixed during the whole process at 10% with no charge on the undrawn amount and the total construction costs are $14M. Calculate the interest incurred. THATS ALL.
Ray
I would ask the lender who as indicated they will do the deal as to how they charge the interest and when they will release payment.
As each lender is different and we have no idea who it is best to get it from the horses mouth.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
raymond123 wrote:Hey guys thanks for the replies. Just to clarify, We do work in the construction industry, but this project will not be built by us. We are just acting as the developers. We have an independent builder taking on all aspects of construction not us. All the information i am giving you is straight from the lenders mouth. i am not making this up or trying to interpret it. Like i said, "presales are a must" so we are aware of the need for presales. I didnt say we dont need pre sales. This is no issue for us, because the department of housing has an interest to pre purchase 80% of the units. In regards to the progress payments, i know how the claim process is from a builders perspective, as i work in the industry. However, due to the scale of the project, i have seen in similar situations sometimes a starting payment. Also, the lenders have been telling me the progress payments are structured in a specific way. This structure is what i am after. Also i am curious if the lenders terms suspersede the builders or if this is mutually agreed upon based on different projects. I appreciate the input regarding rates, percentage of funding, presales and the process etc. But those are not issues i need help with. Those have already been addressed. My question is ONLY based on the calculation of the interest. Perhaps, let me word it like this. Forgetting presales and the percentage of costs that is being funded, a construction loan has been approved. The project begins, takes 24 months, and the interest rate is fixed during the whole process at 10% with no charge on the undrawn amount and the total construction costs are $14M. Calculate the interest incurred. THATS ALL.Ray
Hi Ray,
The only way to do it is to produce a cashflow spreadsheet and calculate interest on a montghly basis. You can't ignore the line fee, you will be charged on the undrawn funds and it will be a very big part of the interest cost. You also won't get a fixed rate on a contruction loan, so you would be wise to sensatise the rate you use, although at the moment it seems more likely rates will go down than up.
Regards
AlistairQlds007 wrote:Alistair my sentiments exactly.Ray seems to think that his local lender will approve the loan without any prior experience and that pre-sales are not a problem (might have to get him to market some of our projects) given that he is in the construction industry so all good there !!
Must admit 8.5% seems like a jolly good rate for a first timer.
Cheers
Yours in Finance
You might be right re the rate, I've generally found that unless a lack of experience can be mitgated by using a project manager that is well know to the bank, or an experienced partner is brought in, that getting the loan approved in the first place is the major issue rather than rate. The banks also seem to like playing funny buggers with the line fee, increaing the cost without raising the headline rate as theyt know that is all most people look at.
This probably a good place to raise this as a point for anyone readoing this who has not taken out a commercial construction loan before. With residential loans the headline interest rate forms the majority of the cost of the loan, this is not the case with contruction funding, cost is a mix of:
1. Fees
2. Headline interest rate
3. Line fee on undrawn funds
4. The discount or marketing fees you need to pay to meet your presale requirementFor smaller projects there may or may not be a requirement for a QS report, which is another cost, and for larger project there can be any number of specialist reports requested which can delay and add extra costs.
I know both Richard and Alistair well. Both are great brokers.
Alistair is a commercial broker and able to finance large development projects.
Nigel Kibel | Property Know How
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What are some typical line fee rates?
raymond123 wrote:What are some typical line fee rates?2% is typical for a line fee at the moment, it all depends on how they price the rest of the deal though.
thank you Alistair
here’s a free youtube video talking about the development feasibility study for you
http://www.youtube.com/watch?v=j9XfmlRfEPM
all the best,
Jill
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