Structuring finance for development, small or large, residential, commercial, office, industrial or land depends on the project itself, builder and developer experience.
Developer experience and builder experience being the major risk, especially the builder, the lender will generally “qualify” the builder before funding for construction.
The amount of “equity” in the project is very important to any lender, it provides flexibility and options for finance.
We can help fund all stages of the construction cycle, from financing the initial property purchase to approval of costs and construction drawdowns.
Typical property development structures fall into four (4) main categories:
Full Doc Development Finance Facilities – sourced by banks and other major financial institutions, usually require pre-sales to cover major debt and current up-to-date financials. However, it’s the cheapest form of construction finance currently available in terms of interest rates.
Higher than bank LVR (stretched) Construction Finance – facilities that go to a higher LVR than typical lenders on a senior debt basis without using a mezzanine facility. It can extend to 75% of GRV. However, we will not fund or recommend to fund any project with a higher LVR since the risk is too high and many projects with an LVR higher than 75% also gave a higher failure rate.
Low Doc Finance – Some cases require No Pre-Sales and are usually sourced through private investors/lenders. The main advantage is they generally do not require pre-sales or financials since the approval is project driven. They “can” be more flexible in lending criteria. However, they are more expensive and have a fixed term “period” in months for completion of the project. If the project “completion and settlements from sales” (not construction) exceeds this period, heaving penalties can apply.
No Doc Finance – Purely project driven, similar to Low Doc Finance but much more expensive and not recommended.
Example of the initial stages and documents required before funding can be approved (After DA Approval):
To confirm the figures provided by the developer, the lender will proceed to provide quotations for a QS (Quantity Surveyor’s) report immediately.
The first steps here will be getting an initial QS report, trade summary, and builder contract, and valuation under a residual land value and on-completion Inc and Ex GST (informed by the latter).
After these values are firm, the lender will construct a Property Development Model and provide and request an indicative funding table for you.
Construction risk, the lender will also need to qualify the builder. The below list is a head start on the process.
- Evidence of track record in the scale & type of construction you are looking to fund;
- ATO Portal Integrated Client Account;
- Company financial statements for the current and previous 2 years;
- Records of Legal Actions, material disputes and/or Government enquiries involving the company or its directors;
- Current aged-payables listing signed off by an external accountant;
- Employee chart / structure;
- Resumes/CVs of the chief/senior staff proposed for the project under consideration;
- Builders licence showing ‘Classification’, ‘Tenure’ & ‘Revenue Category’;
- Evidence of Workers Compensation insurance;
- Summary of completed projects showing at a minimum: “year complete”/ “project type” / “construction cost”;
- Summary of current workbook showing start / completion dates;
- Summary of current projects being funded by NAB;
- Work Cover history.
The above is very important for the lender, especially if funded by a major bank or financial institution.
Example of some general costs by major banks or major financial institutions before construction stage:
- There will be an Application Fee & Brokerage Fee (will discuss this with you);
- The interest rate can be around 3.5% – 6% (depending on risk, will negotiate for you);
- Line Fees are ‘normal’ with this type of funding, which would be in addition to the Application Fee;
- QS Fee;
- Project Valuation Fee;
- State and Government fees and charges;
- Legal Fees bank and developer.