Commercial Development Loans

Finance for property development usually operates as an interest only, draw-down facility to finance development as necessary. Often the interest on a development loan is capitalized during the development phase, with the complete loan comprehensive of interest charged being repaid upon the trade of the development and or the refinance of any residual debt.rnBorrowing capacity and highest LVR for property development loansrnThe borrowing capacity you can get for development finance will differ depending on the development lending criteria you are required to meet. This will be different from lender to lender and also defendant on the tender.rnNormally, Land Development Cost financing will provide up to 80% of the hard costs of your development, whilst GVR financing will provide up to 65 to 7o% (ex GST and agent selling costs). For a full overview of your borrowing capacity, consult a commercial lending specialist.rnFinance options for property developmentrnLand Development Cost (LDC)rnLand Development Cost finance provides property developers with the funds to undertake the acquisition and construction of the development. It also includes soft costs such as architecture, engineering and interest costs.rnThis is the most common form of development finance and is generally limited to between 70%-80% of the overall Land Development Costs of the development project. You may be required to achieve a pre-determined level of pre-sales before finance approval will be granted generally 50% of peak debt or more.rnMezzanine financernUsually only available to experienced property developers, mezzanine finance involves the use of money from external investors rather than deposit capital from the developer or equity partners. This funding supplements senior debt (LDC and GRV funding). It traditionally involves both specialist lenders and private investors. The interest rate on a mezzanine finance facility is normally higher than other property development finance methods, and is based on a number of factors including risk and total pre sales. rnLender criteria for development financernLenders will look at a number of areas when considering if they will provide finance for a development project. These may include: • Project management team experiencern• How much equity you bring to the projectrn• The location of your proposed developmentrn• Type of Development (Residential v Commercial) • Level of pre-sales/pre-leasesrn• Ability to cover cost over runsrn• Exit strategyrn• Your experience as a property developerrn• Financial strength of the property developerrn• The profit potential of the developmentrn• Builder experience and capacityrnExperiencernExperience 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. rnEquityrnThe more equity (deposit/capital) you can provide at the outset of a development project, the more favorably 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.rnProfit potentialrnPart of securing finance is being able to determine the profit potential of your development project. Part of the funding process will involve a feasibility study conducted by the lender’s valuer to determine the profit margin. This step is critical in determining profitability and its acceptance to the lender.rnDevelopment purposernIn some cases, very specialized developments, such as for a childcare centre or motel, may attract additional conditions from the lender before finance is approved, simply because these types of developments are very specific. A more general development, such as an apartment block, may be easier to find development finance for.rnThe costs of property developmentrnDepending on the scope of your project, the costs of property development and construction may include: • Contingency allowancern• Stamp dutyrn• Professional/legal Land/building acquisition costsrn• Construction or refurbishment costsrn• Interestrn• Selling & Marketing Expensesrn• feesrn• Architect, Engineering, Quantity Surveyor, (Specialist Consultants as required) • Finance Costs.