Property Development Funding
Getting The Basics Right For Construction Funding
We believe in strategic planning of projects and capital to maximise your wealth! Which is why we ensure you have done the below items before going for a loan.
1. Project type and cost analysis: Have you chosen the right project and configuration, to maximise the GRV?
2. Project feasibility: A feasibility that a lender can easily understand to know the true profits of the project.
3. Project valuation: Can the project easily be valued, or will it require specialist valuers? The more complex, the more likely you'll need a financier that understands your specific risk.
4. Plans and permits: Do you have the right plans and permits to commence construction?
5. Corporate structures: Do you have the right corporate structures and asset protection in place to maximise borrowing, and minimise cross collateralisation?
6. Project complexity: Project time frame and opportunity cost (will this project rob us of future profits and time?).
Contact us to find out the power of having an experienced advisor work with you!
Property Development Funding
Property Development Funding: Site Acquisition Funding.
We understand the unique requirements of property developers to be able to fully leverage their capital. Whether capital is required for site acquisition funding, or an urgent refinance facility, we can provide urgent funds to meet your needs. We work with a range of family offices, that can help with your next site acquisition as part of your construction funding mix.
- Site acquisition funding, with higher LVRs than other lenders.
- Funds settled within 7 business days.
- Interest can be paid monthly or capitalised, with interest only repayments.
- Competitive lending rates for monthly interest payments.
Construction Lending
Private Constrution Loans: Senior Construction Debt Facilities
We work with several family offices, onshore and offshore funds to find you the right senior debt lender for your specific project! No one project is like alike, which means selecting the right lender for your specific project is critical to your success! Alternatively, you can always speak to us about bank funding, so we can point you to the right bankers. Key features of the funders we work with are:
- Higher LVRs, up to 75% of NRV.
- Mezzanine finance and or preferred equity can be put on top of senior debt with the same funder, if project fits requirements.
- No presale requirements in some cases or 20% presale requirements depending on the project.
- For single dwelling projects, internal valuations can be done instead of external valuations.
- Refinance of construction projects, where a previous lender has opted to leave, or a builder has failed to complete the project.
- Competitive risk adjusted pricing.
Contact us for your next construction facility
Construction Lending
Presales Property Underwriting: Enabling Lending
We work with family offices that are prepared to underwrite certain properties to help property developers achieve their presales requirements with senior lenders. This enables property developers to achieve their presales requirements, which speeds up the senior lending piece helping to save on holding costs.
Once construction is complete, property developers then have the right to remove the underwriting, and to sell the property on the open market at a higher price! This service is provided in a limited set of circumstances.
- Commercial, light industrial and retail properties
- Up to $10M of underwriting can be provided
- Melbourne properties only.
Contact us to find a unique solution to your situation.
Construction Lending Preferred Equity
Builder Coalignment Perfected: Preferred Equity
Where you have an equity shortfall to commence a project, we have highly reputable builders in Melbourne that are willing to provide an equity injection if they are awarded the building contract. These types of ventures create a truly unique coalignment between the property developer/landowner and builder, as the builder is now financially invested in the completion of the project beyond their own builder’s margin! This eliminates the fear that most property developers have about a builder being solvent! Typically deal terms are.
- For investment and property development purposes only.
- Preferred equity position for the builder.
- Builder is awarded a security position for the funds they are contributing over the project.
- Senior lender must be a bank.
- Builder will sign a separate building contract with the property developer with normal project terms.
- Builder to be a joint manager.
Property Development Joint Ventures
Builder Joint Ventures
Our builder developers have two JV models that that property developers or landowners can utilise. This provides property developers and landowners the ability realise projects they otherwise would not be able to, whilst making them multi-millionaires in the process! Our team of builders can help with end to end development, from plans and permits through to final construction. We have two models, a private lending JV or a Bank funding JV.
Private Lending JV
- Builder developer will provide senior debt facility at private lending rates to the landowner.
- Builder must be awarded the build contract, with a minimum build contract of $1M.
- The builder must be appointed as joint development manager, and have their equity treated as preferred equity.
- Builder must be awarded the build contract, with a minimum build contract of $5M.
- The builder will sign a standard build contract with timelines, to protect the interests of both parties nor to abuse the finance they are providing.
- Melbourne properties within 40kms of the CBD.
Contact us for your next builder joint venture!
Family Office Joint Ventures
Property Development Family Office Joint Ventures
Do you have land or property development that you want want to develop but can't get off the ground because of a funding shortfall? At RSC we have the ability to partner you with a family office to turn your property development ambitions into a reality. Key terms of the JV include.
- Preferred equity position for the family office equity contribution.
- Family office will be the lead manager for the project and co company director for the SPV.
- Family office will organise bank funding or provide the senior debt facility themselves at private rates.
- Builder to be agreed to, between the family office and project owner.
- Projects up to $50m to be considered.
Property Development Funding
Your Construction Loan Application
We streamline your construction loan process to ensure all necessary hygiene factors are in place and that your project secures the greatest amount of funding!
RSC review
- We check the project to ensure it is feasible, and that it will meet the requirements of our funding partners (family offices and wholesale funds). If we feel your project can be better served by a bank or a second tier, we will introduce you to a banker.
- We get you a property accountant to help you create an internal feasibility if you don't already have one, to ensure accuracy of costs and profits. Secondly, we will introduce you to lawyers to help you determine the right corporate structures for your loan to proceed.
- We then put together the right mix of funding solutions for your project specifically. This may be a combination of senior debt, underwriting or a property joint venture.
- We will then speak to our funding partners about your project, and determine which one will be best suited for you. Additionally we determine which valuers our funding partners will use to ensure they are suitable for your project.
- Our funding partners will then review the deal and provide you with a letter of offer.
- Our funding partners may require a valuation and QS as part of their terms.
- On completion of DD, the funder will then send formal loan docs to your lawyers, for the commencement of the facility.
What are construction loans?
Construction loans are loans to enable property developers the ability to get funding to commence the building / construction element of their property development project.
One of the key aspects of choosing the right construction lender, is to make sure you are choosing one that understands your specific project. The better a lender understands your project and its risk, the better terms you'll get. Construction lenders that don't understand your project and that perceive it to be high risk, will not be competitive in pricing.
When it comes to picking a construction lender for your construction facility, the bulk of scenarios can fit into bank or second tier funding. If you need a banker to help you, speak to us and we'll introduce you to one.
One of the problems with bank funding however, such as CBA construction loans etc, is that they have high debt cover ratios which requires a high degree of presales. Secondly, they may also also only lend you an amount in ratio to your income! What all this means is increased holding cots, delays to your project, not enough money to complete a project and high opportunity cost (the ability to reinvest funds quicker)!
Private construction lenders have far less stringent conditions than banks with less presale requirements if any, and less of a focus on your income. This ensures that you can get project funding sooner than later. Whilst private lenders charge more than banks, the benefits of a private construction loan are offset by ease of funding, quicker project starts, less holding costs and less opportunity costs (as you can reinvest profits quicker).
What is mezzanine finance?
Mezzanine finance is debt that is secondary or subordinated to a senior lender. In other words, they fall behind the first mortgage holder. Mezzanine finance is a form of second mortgage lending, and is typically used to describe construction loans that are second ranking in nature.
Mezzanine finance loans can be second to a bank construction facility, or they can be second to a private lender. Because construction loans are high risk, and mezzanine finance loans are taking on more risk than the first mortgage lender, they are typically priced higher.
Typically, mezzanine finance loans are used for the shortest periods of time, and are brought in after a senior construction loan has commenced!
Mezzanine finance can solve several problems. Firstly, if you have a debt capital shortage, mezzanine finance can help fill the gap. Secondly if you have an equity shortfall, mezzanine finance can also be used to fill the gap.
Mezzanine finance can solve several problems for property developers. The trick to using it, is to bring it in only when it is needed and for the shortest possible duration of time.
How does a construction loan work?
Construction loans work on a progressive draw down of your facility. For example, you may require $3M to do a construction job, to pay your builder (make sure you pick a reputable builder).
This $3M may be required over 12 months and paid every second month. So, 6 tranches of $500k for example, being paid after each stage, for a total of $3M.
Typically, with construction loans, that are two ways interest is charged.
The first is the interest being charged on each progressive payment/ draw down that is made, until those funds are repaid.
The second is a lower rate, which is a line fee charged on your total facility, until the total facility is repaid.
Generally speaking, a QS is done before each stage of funding being released. This is to ensure, that works have been done properly by the builder.
How does a property development joint venture work?
A property development joint venture works when two parties, usually a landowner and a property developer come together to bring a project to life. There are also several different JVs that can happen that we've listed below for you to consider. With most JVs, typically they are done because there is a funding shortfall, so another party comes to the table to provide the shortfall of capital or the whole capital stack.
Landowner and builder developer
This JV is between a builder who is also a developer with a landowner. The landowner may have no debt on the site or some debt, but for whatever reason doesn't have the funds to get plans and permits approved, or doesn't have enough equity to commence construction.
In this scenario, the builder developer, will provide the shortfall of funds, whilst also taking on the build contract. The builder developer may facilitate bank funding or bankroll the whole project themselves from their own funds, by providing a private lending facility to the project.
The builder developer wins, because they get a new building project which is done on market terms, with a legally binding building contract. They also win because they get an equity component of the project for any funds they may provide, giving them a higher return.
The landowner wins because they now have a builder they can trust because the builder is financially invested into the project. They also get the funds they need to commence construction, and they typically make more money than if they just sold the site.
In this scenario, both parties are highly coaligned, and this JV often provides the best returns.
Landowner and property developer
This JV is between the landowner and a property developer. The property developer will provide a shortfall of capital, help with plans and permits being approved, bring the right builder and organise finance.
The landowner will provide the site, with their equity contribution being the land value with the permit value.
This allows the landowner to make a return on their equity component that is greater than if they just sold the land to the developer at permit value. Essentially because their equity component (the land value with permits) is being put to work within the project, they end up with a much higher return.
The property developer wins, because they have a premium site and they do not need to pay financing costs on the land value with permits. In addition to the profits they make for the financial equity they provide and expertise to the project.
At Royce Stone Capital, we will only support a JV with a property developer if the property developer is a family office. 90% of property developers are cash poor, and having a family office back a project is when the land owner can have certainty that things will go to plan.
In the instance where the property developer is a family office. The family office may provide financing to the project themselves at private lending rates, or they may source bank funding for the project.
Property developer and builder joint ventures.
One of the largest issues at present is the fact that property developers don't trust builders, because of solvency concerns. The concern is that a builder could go bust halfway through a build project, costing the property developer millions. At the same time, several builders don't trust property developers because of concerns around payment and them being funded.
Property developer and builder joint ventures, helps to put both parties at ease by being joint lead developers. In these JVs the builder will contribute cash equity towards the project and will also win the build job. Because they are also a joint development manager, they have oversight over the project development and how funding between the bank or private lender is working.
The property developer wins because they now have a builder that is financially invested into the project, and they can have certainty of completion.
What are the benefits of private construction lenders?
Private construction lenders have far less stringent lending terms compared to banks. Typically, private construction lenders offer the following benefits.
- Less experience required from the project owner.
- Serviceability is usually not a factor.
- Zero to minimal presale requirements.
- Quicker application processing time compared to banks.
- Higher LVRs than banks in some instances.
- Because of the quick funding delivered by private construction lenders, holding costs are reduced.
- Because of speed to funding through private construction lenders, project profits can be quickly reinvested, thus reducing opportunity cost compared to a bank.
