Development Finance
Get your development project off the ground
Development projects can come in a range of shapes and sizes. Whether its your first project or you've got a number of big projects under your belt, there are a vast range of lending options out there. Having an adviser working by your side helps you find the right loan solution.
Assessment Criteria
Main Bank
Non Bank
Loan Types & Costs
Assessment Criteria
The assessment criteria of development loans can be a bit different from a standard home loan. There are a few different policies which can impact the lenders willingness to fund the project and the information below highlights some of these differences.
Equity
Equity requirements can vary drastically between lenders. Depending on the lender there can be 2 terms to keep an eye which represent how much equity you need to have/provide. These are the lenders 'loan to cost' and 'loan to value' ratios. Loan to cost references the cost of the project and the latter refers to the completed value of the project. When they see risk in one area of the project the equity required will typically rise to protect from this risk.
Exit Strategy
Most development funding is issued with the expectation of being repaid over a short period of time. This is often around a year but can extend further if required. The exit strategy refers to your plan of repaying this lending which can come in a few different forms but is often the sale of the properties being developed. The lender needs confidence in the strategy to repay the lending.
Pre-Sales
Pre-sales are the units in the development which have been sold ahead of completion. This gives the lender confidence that once the project is finished you will be able to repay their investment into the projects. Not all lenders require this but it does reduce perceived risk so it is worth exploring lending options depending whether you have pre-sales or not.
Experience
Another factor that lenders will consider is your experience with property development. This is especially relevant for large scale projects but there are still options available if this is your first development project. There may be a more involved process and some extra requirements if you are still growing your experience.
Location
The lender wants to be confident that the project they are funding can be easily sold so location becomes an important factor. Auckland is usually looked on favourably and some lenders will only fund into this market. If the rest of the project meets criteria then there can be options for developments outside of Auckland and main cities, but this list of options will be smaller.
Feasibility & Timeframes
Another consideration is if they feel the project can be completed within the estimated timeframe. Different lenders will approach this assessment differently, it may be done in house or third party reports may be required at the borrowers cost.
Main Bank Options
Main banks don't focus on development finance, usually due its short term nature. So it may not be available or the most suitable option. But if your project does meet main bank policy it will likely be the best priced option.
Construction Lending
If your project meets certain criteria then it may be able to be done as a residential construction loan, meaning residential interest rates and even special discounts. To get access to this the application would need to demonstrate your ability to service the loan amount long term and an intention to hold onto most of the resulting units being developed.
Standard construction lending can be done up to 80% LVR for standard construction this but can drop to 60% or lower if certain size and internal policies are reached. It is very dependent on the project and size, so checking with an adviser can be a great place to start.
Development Lending
When the loan gets outside the realm of residential construction, development lending policies kick in. For many banks this will exclude them completely and for those still willing it likely means a lower LVR requiring more input. At this point the non bank options which specialise in development finance can be a good place to turn.
Non Bank Options
Non banks can provide a pragmatic solution to your development project. These lenders are subject to different regulations so they can extend funding within their own credit criteria more freely. This often means more favourable assessment of the project and ore flexible solutions.
LVR Requirements
As mentioned above there are a number of factors which can determine how the project is assessed. It is often to prepare a quick brief of the project and see how much different lenders would be willing to lend.
In House Support
For some lenders, development finance is their focus and a lot of their processes are kept in house. For first time developers, these lenders can provide some support based on the years of successfully funding developments.
Capitalised Interest for Short Term Funding.
For development finance, the term of the loan is usually short term and will be repaid as soon as the project is finished. Capitalised interest refers to the interest costs being added onto the final loan repayment figure as apposed to ongoing regular repayments. This figure can then be built into profit margins for easier assessment of the projects return and less strain on cashflow during the project.
In this case, a lot of the time the application process doesn't need to include your income position. Focus is put into the project and the exit strategy to repay the debt within the loan term.
Loan Types & Costs
There are a number of different options out there to fund your development projects. To keep you informed when selecting a lender there are a few extra costs and loan types to keep in mind
Line Fees & Application Fees
Especially when looking at non banks. Be aware of up front fees. Working with an adviser can make the process a lot easier and save you time and money by getting you access to a suitable lending option. In a lot of development lending scenario's the lenders commission fee for an adviser is on charged and added to the loan amount. This can be negotiated with the adviser.
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A line fee refers to the cost of having a loan active even if it isn't fully draw down. For example, if your full requirement for completing the project was $1,000,000 and it was expected to last 18 months then a line fee would be a percentage cost based on the full $1,000,000 for as long as this is active. Not all lenders will charge a line fee which means saving money while that full loan amount isn't being used.
Interest Rates
The interest rate you receive will be heavily dictated by the estimated risk of the project mentioned in the assessment criteria. Available rates can also vary by lender along with any other costs so make sure to assess the interest rate with the overall cost of the lending. Interest rates can be charged on a serviced basis where regular repayments are made, or a capitalised basis where the interest is added back onto the loan at the end of the project.
Valuations & Quantity Surveyor Reports
Different lenders have different styles when it comes to assessing your application. If they are taking a third party approach this may mean paying for Registered Valuations or Quantity Surveyor reports. These costs can add thousands to the cost of obtaining funding. Other lenders may take a more in house approach which uses their own experience financing projects to assess the risk of a project.
Early Repayment Fees
Hopefully the project goes so well that you can repay the lending before the term of the loan runs out. In this case, some lenders will charge early repayment fees. For others there may just be a notice period until the loan can be closed but no additional fees which means a lower cost at the end of the project.