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The Definitive Guide To Property Development Finance In 2019

This is the ultimate guide to Property Development Finance in 2019.

And let me be clear about something:

This is NOT a half baked “Development Finance in 2019” predictions post.

Yes, I’ll cover the most important DEVELOPMENT FINANCE trends for 2019.

But you’re also going to see the strategies that are working right now… and will continue to work even better towards 2020.

So if you’re looking to get your development funded this year, you’ll love this guide.

 

Bank vs Non-Bank vs Private Lenders

In this section, we’ll go over the differences in development funding.

First, you’ll learn exactly what the banks are currently doing.

I’ll also explain why non-banks and private lenders are not a bad option for developers who want to get their projects started sooner.

brisbane development finance

What is development finance?

Development Finance (also known as “construction finance” or “property development finance”) is a form of funding that assists with building multiple residential, or commercial properties. This form of funding is available through Australia’s big banks, non-banks and private lenders.

What is gross realised value (GRV)? 

The gross realised value (GRV) is the ‘on completion’ value of a property development project. This is a common term used by many banks, and development finance providers and is used to determine how much borrowing they can extend. Most will fund against GRV, excluding GST.

What is total development costs (TDC)?

Total development costs (TDC) is the complete sum of all the costs to purchase your development site, obtain the DA, construct (including contingency), marketing, sales as well as interest and holding costs. The TDC represents all the costs involved with completing a project.

 

Why You Use a Bank for Development Finance

Like I mentioned, development finance is needed if you want to build a block of units or townhouses. A few years ago, the only way of getting these funded would be going to see your local bank.

So you’d need to go see ANZ, NAB, CBA, Westpac, St George, Bankwest, Adelaide Bank, BCU or any of the smaller banks and ask them for funding.

major banks

They’d tell you how many pre-sales were required, the maximum TDC (total development costs) and GRV (gross realised value) and you’d be away.

In the last few years, the banks pre-sale hurdles have increased and increased.

For example, we funded a recent customer through one of the major banks and they wanted to see 50% of debt cover in pre-sales, but would only extend to 70% TDC.

In other words, they needed to show $4m in pre-sales to cover the $8m in debt the bank was giving them.

(And we all know off the plan sales aren’t getting easier)

The question is: How can you get your development started quicker, with fewer pre-sales?

 

Why You use a Non-Bank 

Non-bank lenders have grown into the property development finance space over the past few years, as the major banks have become more conservative in their approach.

(They can also be referred to as specialised development funders)

So you can go and see La Trobe Financial or Trilogy Funds, they would say you could start the development with no pre-sales (or a much lower hurdle) and you could be away.

non bank development finance

Non-bank and specialised development finance providers can help get your project started MUCH quicker.

These lenders usually have a pool of money from individual investors, self-managed retirees or large investment companies.

The other advantage of using a non-bank lender is that they will extend a higher TDC, in some cases up to 85%.

Put another way, you will need much less equity when compared to a bank.

But are there any other ways of getting started with less equity, or deposit?

 

Why You use a Private Lender 

Private Lenders offer the most flexibility around both pre-sales and increased leverage.

This includes mezzanine funds, or what is sometimes referred to as stretch senior debt.

There are private lenders who will lend up to 90% of TDC – they still want to see some money in there…

Private Lenders usually fund the loan themselves, so there is the most flexible around valuations, quantity surveyor reports and even sometimes with Directors Guarantees.

…but it does come at a cost

loan shark private lender

Private Lenders are not to be confused with loan sharks and can make sense in a project that is just short of equity, or be a good solution for a developer that needs to withdraw cash from one development to fund another. 

Using a Private Lender for a construction loan is the most costly of the finance options.

So lets deep dive into what this looks like.

 

Bank Finance (Senior Lenders)

For the banks, your experience can make a big difference.

If it’s your first development the banks are going to want a lot more information than if it’s your 20th.

(And this is just one of the factors on how they will assess your project)

In this section, I’ll show you how to get development finance through a bank.

gold coast development

 

How much can I lend? 

Quick Snapshot of senior bank development finance in 2019.

  • Multi-residential development: Borrow up to 75% of the total development costs (TDC), or up to 65% of the on completion, or gross realised value (GRV) excluding GST.
  • Commercial Property developmentBorrow up to 60% of the total development costs (TDC), or up to 55% of the gross realised value (GRV) excluding GST.
  • Max Facility Limit: Up to $100 million.
  • Max term: Up to 36 months
  • Repayment Source: Interest can be capitalised
  • Interest/Fees: Case by case, broadly 0.30-0.50% establishment fee and all in rate 5.50%-7.50% pa.
  • Pre-Sales: Under $2M lending, case by case. Over $2M, 50-100% of debt cover.
  • Residual Stock Lending: Case by case, depends on location and sponsor.

Different banks have different interest rate structures. Some will charge a line fee, others charge an all in rate.

Call us on 1300 088 065 or fill out our online assessment to see if you qualify.

 

Advantages Disadvantages
✅ Lowest interest rates compared to other funding types ⛔️ Higher presale hurdle required
✅ More flexible with developments in regional areas, outside of major capitals ⛔️ Lower leverage in both TDC and GRV compared to other funding types
✅ Higher total facility limits are available. ⛔️ More verification and documentation required, so can be slower than other funding.
✅ Experienced developers can get much better deals than those who are starting out. ⛔️ In most cases, will require personal guarantees from Directors and GSA’s from related entities.
✅ Can be more flexible if the project is delayed and facility term needs to be extended. ⛔️ More restrictive for owner builders, and developer builders.
⛔️ Usually, want to see an 18-20% minimum return on costs as profit (with residential development)

 

What will be used as security?

  • First mortgage over the real estate being constructed
  • A General Security Agreement (GSA) over all your rights in relation to the security property, and all related presale deposits held (yep the lenders see your presales as their security!)
  • Full recourse director and shareholders guarantees
  • A tripartite agreement between the developer, the bank and the builder.

 

What does their lending criteria focus on?

As I mentioned, your experience as a developer is key when working with bank finance.

… but that’s not all

The banks will want to deep dive into your project history, your assets and liabilities, understand your experience marketing projects, who you are working with, the area you are looking at building in and most importantly who you will be getting to build the development.

Those points are really the tip of the iceberg when it comes to bank lending.

bank development finance

 

Who banks are good for? 

Banks are great for larger projects, over $5m in funding requirements and those which have made strong sales.

They offer the cheapest funding because they take the least amount of risk compared to the non-banks.

 

Non-bank options

The non-banks and specialised development funders aren’t as concerned about your experience.

They assess development finance more as a traditional asset lend.

And while they do want to make sure you have enough money to complete the development, they are more concerned about the project itself rather than your experience as a property developer.

In this section, I’ll show you how to get your project funded through a non-bank.

specialised property development finance

 

How much can I lend? 

A quick snapshot of non-bank development finance options in 2019:

  • Multi-residential developmentBorrow up to 85% of the total development costs (TDC), or up to 70% of the on completion value excluding GST.
  • Max Facility Limit: Up to $15 million.
  • Max term: Up to 18 months
  • Repayment Source: Interest can be capitalised
  • Interest/Fees: Case by case, broadly 1.50-2.50% establishment fee and all in rate 9.95%-11.95% pa.
  • Pre-Sales: Under $8M lending, nil presales. Over $8M, case by case.
  • Residual Stock Lending: Yes, LVR depends on location and sponsor.

Different specialised development lenders have different interest rate structures, which can be negotiated depending on your situation and the project itself.

Call us on 1300 088 065 or fill out our online assessment to see what your options are.

 

Advantages Disadvantages
✅ Nil presales required, meaning your project can get started faster. It also can reduce your cost of sales, as you are less reliant on investment marketing channels. ⛔️ Not the cheapest interest rates, and fees available to developers.
✅ Higher leverage across both TDC and GRV compared to the banks. ⛔️ Will only lend in the metro, and category 1 areas so will not do regional locations.
✅ Less stringent documentation requirements so can be much faster than the major banks. ⛔️ Cannot lend over $15m in facility limits.
✅ May not need full GSA’s from related entities, only need directors guarantees. ⛔️ Can get expensive if the project takes longer than anticipated and the facility needs to be extended.
✅ Can help owner builders and builder developers ⛔️ Some specialised development lenders charge monthly project monitoring fees
✅ More flexible with the developer’s profit margin, and can accommodate lower profit return projects.

 

What will be used as security?

  • First mortgage over the real estate being constructed
  • Limited recourse directors guarantees
  • Can negotiate a limited General Security Agreement (GSA) over all your rights in relation to the security property, and all related presale deposits held.
  • Full rights and designs to any and all intellectual property held on the site
  • A tripartite agreement between the developer, the bank and the builder.

no presale development

 

What does their lending criteria focus on?

As I mentioned earlier, your experience as a property developer is less of a concern with specialised development funders.

They assess every project individually, looking at the property itself, the area it’s in, and how saleable it could (potentially) be if something were to go wrong.

The benefit of this is two-fold:

Firstly non-bank lenders do not need to trawl through your financials, which as a developer can look amazing one year – and not as good in the next year while you are getting a project off the ground.

Secondly, if you have a really good development project, in an incredible area that is harder to make presales they can be much more flexible with presales.

For example, if you are constructing owner-occupied targeted 20 units in Paddington – it’s going to be difficult to make presales – compared to building 30 investment grade units in Albion.

Where a bank would take a broad brush approach to this, the specialised development lenders can offer flexibility.

 

Who are the non-banks good for?

The non-bank specialised development lenders are perfect for small to medium sized projects.

We find the sweet spot up to around 25-30 units or townhouses.

Not needing presales means you can get your project started much faster, and potentially sell for much more as you won’t need to rely on expensive investment channels to make sales.

 

Private Lending

It is not so common to do an entire property development using Private Lending.

(Because it’s so costly)

Interest rates usually start at 16% pa, and if it is a mezzanine facility it starts from 20%.

For this reason, mezzanine and stretched facilities usually sit behind a senior bank or specialised development lender as a second mortgage. The Private Lender is taking more risk than the first mortgagor, and therefore charges more.

This can also be structured as preferential equity (pref) which doesn’t involve a second mortgage but may involve taking a share of profits.

The benefit is that you can put in much less equity, or withdraw your equity before a project is completed to move onto your next development.

private lender

 

How much can I lend? 

A quick snapshot of current Private Lending options:

  • Multi-residential developmentBorrow up to 80% of the on completion value, excluding GST, or up to 90% TDC.
  • Max Facility Limit: On application
  • Max term: Up to 24 months.
  • Repayment Source: Interest can be capitalised
  • Interest/Fees: On application, broadly 2.00-5.00% establishment fee and interest rates > 16% pa.
  • Pre-Sales: On application, generally nil presales.
  • Residual Stock Lending: Case by case, depends on location and sponsor.

 

Advantages Disadvantages
✅ Less equity required, or possibly lower senior bank debt meaning fewer presales + project can start quicker ⛔️ Higher charges mean project needs to have enough profit margin to cover extra costs
✅ Very simple documentation and verification requirements ⛔️ Depending on the structure of private finance, may require consent from the first mortgage holder
✅ Can help owner builder and builder developers ⛔️ Can carry more risk for a developer as you hold much more leverage on the project with this type of funding.
✅ Higher leverage means you can withdraw equity from a project before it is completed. ⛔️ Can get extremely expensive and eat into your profit if the project timeframes run over and loan needs to be extended.
✅ Great if you need to settle a site quickly, or need a residual stock facility. ⛔️ Suited for short term finance, some private lenders only lend money for up to 6 months so not good for a 12+ month project.
✅ Can be structured as preferential equity (pref) to not require the second mortgage behind the bank

 

Senior Stretch Finance: One last private lending option

There are a few other common types of private lending including senior stretch funding and land bank funding.

In the case of senior stretch funding, it is effective private finance structured in a different way.

It is priced based around risk, and is used when you may have made some presales – but not enough to hit the banks target. In this case, the bank might allow you to start, if you put in more equity.

mezzanine finance

 

Who are private lenders good for?

They are usually suited to three types of developers.

One that is wanting to withdraw their equity before a project is completed, and move onto another project.

Secondly, a developer who is slightly short of the funds required to start their project.

And thirdly, this type of product is good if you need to settle a site quickly and you do not have the cash ready.

Private finance isn’t right for all property developers but can suit some situations.

 

Should I do a GRV or a TDC lend?

This is the biggest difference between the banks and the specialised non-bank development finance providers.

For a lot of developers, a Gross Realised Value Loan (GRV) works out much better, although it costs more it has much higher leverage and lower presale requirements.

We’ll go through a case study.

development finance example

All figures are excluding GST, assuming the following figures:

  • ✅ Bank lending 6.50%
  • ✅ Non-bank lending 11%
  • ✅ Construction period 12 months
Bank Lending 70% of TDC  Non-Bank 65% of GRV 
On completion value (ex GST) $                  10,000,000.00 $              10,000,000.00
Land cost / value $                    3,000,000.00 $                3,000,000.00
Construction + Other Costs $                    5,000,000.00 $                5,000,000.00
Interest & fees $                        250,000.00 $                  400,000.00
Total Costs $                    8,250,000.00 $                8,400,000.00
Maximum loan  $                     5,775,000.00  $                6,500,000.00
 (70% of TDC)   (65% of GRV) 
Developer equity required $                    2,475,000.00 $                1,900,000.00
Profit after interest $                    1,750,000.00 $                1,600,000.00
Profit after interest % 21% 19%
Return on equity % 71% 84%

 

As you can see from this example, using a non-bank who lends based on the GRV (on completion amount) does reduce the developers profit by over $150k.

But it means, that the developer does not require pre-sales and furthermore can get the project started much faster.

 

Pre-sale requirements

Presales are unconditional, arm’s length property sales that are made by a developer before construction is completed. The banks need a 10% non-refundable deposit held in a solicitors trust account to consider the sale, a conforming presale.

pre sale requirements

 

Why do the banks require presales?

Before the GFC, lenders rarely (if ever) required pre-sales. The reason is residential developments were built at a much smaller scale than they are being done today.

Back then a project with 50 units was considered large, and at most might require 30% of the project to be sold before the bank would fund the construction.

These days a project of fewer than 50 lots or units wouldn’t be considered that big, and most large projects now contain 300 or more units making the lenders ask for presales to cover 100% of debt…

The reason banks today need presales are:

  • 1. To prove a market exists for that development before they fund. Presales set a line in the sand in terms of price for the completed units, and that buyers are willing to purchase what you are building.
  • 2. Presales form part of the lender’s security. In most cases, the lenders will push to hold the 10% presale deposits in one of their accounts which they can hold, or keep if something were to go wrong.
  • 3. Transparency of offers, and incentives. The banks will instruct their solicitors to review the presale contracts to check there aren’t undisclosed incentives like cash rebates. These could artificially inflate the bank valuation, and affect their security.

 

What makes a qualifying presale? 

According to the bank’s own facility agreements, pre-sale contracts are to be exchanged on the following basis:

  • ✅ Unconditional arm’s length contract in a form and substance acceptable to the Lender. Unconditional means other than completion of the Project and issuance of the Certificates of Title, including no entitlement for the purchaser to rescind the contract should the Borrower be placed in liquidation or another form of administration, or should a mortgagee assume control of the Project for any reason;
  • ✅ Maximum of two residential units per purchaser and a maximum of four foreign purchasers (Australian citizens living and working temporarily in a foreign country not included);
  • ✅ 10% non-refundable deposit to be paid by either (i) cash and held in a solicitor’s trust account with the Lender’s interest noted or (ii) Bank Guarantee;
  • ✅ Bank Guarantees are to be provided by an established financial institution satisfactory to the Lender.  Deposit Bonds provided by an issuer acceptable to the primary lender up to a maximum of three;
  • ✅ No pre-sales to be rescinded/cancelled without Lender’s written consent;
  • ✅ Internal sales to the Borrower are to be assessed by the Lender on their merits to ensure that any arm’s length transactions are treated as valid pre-sales; and
  • ✅ The value/number of pre-sale contracts exchanged are to be confirmed to the Lender by the Borrower’s solicitor on a monthly basis.

 

Development Valuation

One of the most critical parts of the entire development process is valuation.

I have seen valuations that can MAKE or BREAK a development.

So which will it be for you?

In this section, we’ll cover the keys to navigating the valuation process, and tips to get the highest value for your project.

development finance valuation

 

What information will I need for a development valuation?

The lender’s valuer will complete a comprehensive report on your project, it usually contains:

  • ✅ Property details, zoning and title information
  • ✅ Expected as if complete value, and current as is value
  • ✅ Risk profile and analysis of the development approval, property and market
  • ✅ Review any environmental issues, and recommend further reports if the possibility of contamination

These reports are at least 100 pages long, and determine if the lender will approve (or decline) your loan.

 

For this reason, the property valuer will need copies of:

  • Council and infrastructure charges notices
  • Building specifications and internal fit-out/finishes
  • Unit floor areas and/or preliminary survey plan (if available)
  • List/asking prices for the proposed units
  • Pre-sale contracts for the proposed units including any special conditions (if applicable)
  • Building contract

 

When do you need an in one line valuation?

An in one line valuation is where the valuer completes the as if complete value, and then discounts the total figure to assume the property would need to be sold in a single transaction, to one buyer.

Typically we find an in one line valuation includes about a 15-25% discount from the gross realised value.

In other words, if your property development of 25 units has a GRV or as if complete value of $11.250M.

If it was valued in one line, the GRV would be discounted by 25% to reduce it to $8.437M ($11.250 – 25%).

As a developer, this isn’t particularly helpful because it means your lending will be based on that lower figure.

So make sure you know how the bank or lender is going to value your property and check the figures work – before you go out and spend a few thousand dollars on a dud valuation!

If you would like to speak about your valuation, get in touch with our team on 1300 088 065 or contact us here.

 

Information needed for property finance

Doing property development involves a bit more information than when you are building a house.

Obtaining development finance approval needs you to hold the development approval (DA), and ideally have a builder (and their contract) locked down.

So what information do you actually need to apply for property finance?

developer background

 

What information is required for development finance?

At a high level, we will need to put together this information for your project:

  • ✅ Location and number of units in the development
  • ✅ Estimated ‘as is’ value (purchase price) and outstanding debt (if any)
  • ✅ The estimated market value “on completion” or expected sales revenue
  • ✅ Construction Costs
  • ✅ Term required
  • ✅ Presale details (if applicable)

In addition, we will need to collate a credit submission for the bank or lender that covers:

  • ☑️ Developer – Detail Background and experience
  • ☑️ Projects Completed  – Provide details of the last 4 – 6 projects  and who were the finance providers
  • ☑️ Details about the Project – Location, unit details etc
  • ☑️ Copy of the DA (development approval)
  • ☑️ Copy of the Plans
  • ☑️ Feasibility of the Project
  • ☑️ Copy of builders Contract
  • ☑️ Profile & Resume on Builder – Including details of their last 4-6 builders.
  • ☑️ Business Finance Application (Includes Statement of Position for each Director )
  • ☑️ Group Structure – If more than one entity involved
  • ☑️ Copy of Trust Deed if applicable.
  • ☑️ Rental Appraisal on Units being developed
  • ☑️ Copy of pre-sale EOI or contracts prior to being be signed by the purchaser. (Bank Solicitor to peruse to ensure they need the bank’s requirements)

So realistically you will only be in a position to apply for development finance once you have your DA, and all of the information together.

If you would like to talk to one of our Specialised Development Finance Brokers, we can discuss your feasibility and help put together a bank funding table.

Call our team on 1300 088 065 or get in contact to discuss your project.

large development project

 

Finance Process

Even before you have your DA approved, you can contact our team to discuss what the lender funding table will look like.

We can give you an idea on how much equity you’ll need if you go through a bank, or a specialised lender.

contractors make a difference

Assuming you have your approvals in place and are ready to move forward with funding the finance process is:

  • Workshop scenario and quote funding options – In the early stages, we can help workshop your development finance scenario. This generally starts with your feasibility, which we can translate into a bank funding table to give you an idea on what equity and presales may be required. At this stage, we can start high-level discussions with various banks and lenders, but it isn’t wise to start shopping the market until you have all of your information together.
  • Lodge application with funder – Once you have your DA, and builder lined up we will put together a detailed credit proposal for the lender. This will summarise everything their credit team will want to know – from the project overview to the risks and market summary. We will also conduct discussions directly with Senior Credit Managers within the banks, and lenders to get a direct understanding of their view on the project.
  • Funder completes initial assessment – In the previous stage we would have tendered the market, and chosen a lender (or lenders) to proceed to obtain credit terms with. Depending on the project size, and complexity we can look at getting terms from multiple lenders to help make sure you have the best possible deal.
  • Indicative letter of offer issued – The lender will assess your development finance application, determine it meets their credit criteria and issue an indicative term sheet. This is usually subject to further verification, valuation, QS and hitting presale criteria. The benefit is it gives you an idea on what the banks are looking for, the downside is that these term sheets are non-binding, so the banks are not bound to proceed with funding your project. We have seen lots of developers get caught out on this, by having all of their development funding with the one bank.
  • Valuation and QS initial report –  Experienced developers tend to get the valuation earlier in the process, even before approaching the banks to gauge where the valuer’s will put the revenues and potential sales figures – while other developers will wait until they have made some presales (to prove the market) before getting the valuation. Either way, this is a critical part of the process and one that must be done correctly. It is also at this stage you can get the Quantity Surveyor (QS) report, which is required for any construction works over $900k.
  • Funder completes formal assessment – With your valuation and QS report in hand, its time to go back to the funder and obtain formal approval. In many instances, the developer hasn’t hit their presale hurdle yet, and the banks will formally approve the facility subject to satisfactory presales. This is where a stretched senior facility (see private lending above) can help with getting your project started faster.
  • Funder issues a letter of offer and sends legal documentation – Once the facility is formally approved the funder will issue their letter of offer outlining the terms of the facility, and get their solicitors to issue the loan document – like facility agreements, GSA’s, directors guarantees and builders agreements.
  • Funder complete settlement – When the facility documentation is returned, and all pre-settlement conditions have been met the bank or lender will proceed to complete settlement and advance any funds required at this stage.
  • Project monitoring and progress payments – Being a development facility, and similar to a construction home loan the facility is structured to be progressively drawn down. The lender will make monthly progress payments to the builder, this process involves the Quantity Surveyor signing off the works completed before the lender released payment.

If you would like to talk to one of our Specialised Development Finance Brokers, we can discuss your feasibility and help put together a bank funding table. Call our team on 1300 088 065 or get in contact to discuss your project.

 

Need help with development finance?

Hunter Galloway has a team Mortgage Experts, including award-winning Commercial Brokers that specialise in Property Development Finance.

development in progress

Having worked for several of the large banks, we understand how their internal credit policies and processes work and can help navigate your project through to completion.

Get your project started faster, and with no presale requirements by talking to our team today – contact us on 1300 088 065 or complete our form online.

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