It is well known that to secure development finance from a major bank is getting much more difficult. Like the GFC days when it was virtually impossible we are returning to very tight controls. We suspect that is to protect the banks mortgage books from being impacted by over supply. Banks are now often requiring 100% of debt coverage from pre sales and they have pulled back on the percentage of hard costs that they will fund.
We have access to non bank lenders, private equity and private lenders that do not normally require any pre sales at all. They will also approach the way they look at a project from a different angle to the major banks.
Namely, these developer finance lenders will work off the gross realisation value (GRV) of the project rather than the traditional hard cost or total development cost (TDC) method when working out how much they will lend.
The main things non traditional development finance lenders will look at are:
Gross realisation value (GRV) based first mortgage facilities look at the projected end value of the project and will extend funding to a percentage of that. In general the maximum GRV is 65%, or 70% in some cases.
With non bank lenders and private funders, nothing is set in stone. However, below are some guidelines that, if met, will ensure we can help you secure developer finance.
Below is a set of basic figures that we have extrapolated to show the advantages of GRV development finance over traditional hard cost funding.
Assumptions (all figure are GST exclusive):
Interest rate TDC / bank funding | 7% |
Interest rate GRV/ non bank lenders funding | 11% |
Construction period | 12 months |
Hard cost method 80% of TDC | GRV method 65% of end value | |
Realised value from sales | $17,000,000 | $17,000,000 |
Land cost / value | $5,000,000 | $5,000,000 |
Development hard costs | $7,000,000 | $7,000,000 |
Development soft costs | $800,000 | $800,000 |
Interest & fees | $500,000 | $1,050,000 |
Total Costs | $13,300,000 | $13,850,000 |
Maximum loan | $9,600,000 (80% of hard costs) | $11,050,000 (65% of GRV) |
Developer equity required | $3,700,000 | $2,800,000 |
Profit after interest | $3,700,000 | $3,150,000 |
Profit after interest % | 27% | 23% |
Return on equity % | 100% | 112% |
In the above example by using GRV method to secure developer finance, the developer reduces profit by $550,000. However and importantly, they could secure funding with a significantly smaller equity contribution (over a $900,000 less). As there is no requirement for pre sales. The developer also has a possible upside in the sale realisation prices. Even a minor increase in price over the 12 month period would more than make up for the $550,000 in extra interest and fees charged with the GRV development finance method. If you assume a sale price that is 5% higher then that would equate to $850,000 in sale proceeds.