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Construction & Development Finance: Financing Your Property Development Project.

Property Construction & Development Finance types:

Land Development Cost (LDC)

Land Development Cost finance provides funds for property developers to undertake the acquisition and construction of the development project, and typically also includes soft costs such as architecture, engineering and interest costs.

This is the most common form of development finance and is generally limited to a maximum of between 60%-65% of the overall Land Development Costs of the development project. You may be required to achieve a per-determined level of pre-sales before finance approval will be granted.

Gross Realisable Value (GRV)

Gross Realisable Value finance provides funds based on the projected end value (excluding GST) of the property development. Under this finance method, you may be able to borrow to a maximum of between 45%-65% of the expected end value of the final development, potentially enabling you to fully cover both hard and soft costs without incurring any out-of-pocket expenses. Pre-sales are often not required when using GRV finance, but it is generally used for smaller developments only (under $5.0 million).

Mezzanine finance

Mezzanine finance is usually only available to experienced property developers. It involves money lent to the project by core lenders topped up with loans or equity positions from private investors and other specialist lenders. The interest rate on a mezzanine finance facility is normally substantially higher than other property development finance but it typically comprises a smaller portion of the total borrowing for a project, so that the overall averaged cost of funds is kept within workable limits for the project.

Lender criteria for development finance.

Individual lenders will consider a varying number of factors to determine if your project fits their lending model, including ...

  1. The location of your proposed development
  2. Your experience as a property developer
  3. Your financial strength
  4. The amount of equity you have in the project
  5. the experience and capacity of the construction company for this type of project in this area
  6. Experience of the project management team
  7. Residential or Commercial development
  8. Amount of pre-sales or pre-leases
  9. Ability to cover cost over runs
  10. The profitability of the project
  11. Your exit strategy

Property Development Experience

Experience can play an important role in securing finance, but if you are new to property development that doesn’t mean you won’t be able to secure funding. However, new developers may have to provide additional capital, and may not be able to borrow as much money. Depending on the lender, new developers may also need to appoint an approved and experienced project manager in order to secure suitable finance.

4. Choose the right loan.

Interest only loans are the most popular for investors because your borrowing costs are often completely tax deductible. There are many other options however so talk to us about your requirements and we will make some recommendations.

Location

The location of a proposed development is extremely significant factor in securing development finance for your project. Lenders will consider the suitability of the site is for the development, the surrounding area in terms of population, proximity to major commercial centers and other infrastructure, likelihood of major weather events and other factors.

Equity

The more equity (deposit or your own capital) you can provide from the start of a development project, the more favourably a lender is likely to view your application for development finance. A greater equity stake will reduce the risk of financing the project for the lender, as well as your overall development costs.

Serviceability and Exit Strategy

Most lenders need to assured that your project is profitable and will be capable of repaying the borrowed monies together with the interest on the loan. Typically, lenders will appoint a valuer to assess the project. They will also require you to provide a financial plan as to how and when the borrowed monies will be repaid.

Development purpose

Lenders always want to know the purpose of the development, as this forms part of their risk assessment of the project. Specific purpose development usually attract more conditions and sometimes higher rates than more general developments.

The costs of property development

Depending on the scope of your project, the costs of property development and construction may include:

  1. Land and / or building acquisition costs
  2. Architect, Engineering
  3. Quantity Surveyor
  4. Construction or refurbishment costs
  5. Stamp duty, rates & taxes
  6. Interest
  7. Professional and legal fees
  8. Finance Costs
  9. Selling and Marketing Expenses
  10. Contingency provision
  11. Insurance Costs

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