Construction Finance Loans: How to get it and why

November 20, 2018

Low doc and full doc loans from $400K-$100M, settled in as quick as 4 days.


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As a property developer you will have to understand finance and what the banks look for when lending for development projects, which is very different to how they assess financing a simple buy and hold investment.

Since the GFC, lenders have been more cautious about how they fund construction projects. Whether you're a builder or developer and need to fund anything from a couple to over a hundred houses or apartments, or if you're looking at building your own premises, there's still plenty of options for you.

Banks don’t simply lend based on the security of the project; they also want to establish the track record of the people behind the development. It’s important to submit your loan request in a professional manner, including a detailed feasibility study to show that you have allowed for all contingencies.

Lenders generally class 2 or 3 unit projects as “residential” developments and use less stringent lending criteria for this type of project, whereas with larger developments they may require a greater percentage contribution of equity or a level of pre-sales.

Generally for residential or commercial construction projects, the lenders tend to work with two main funding parameters being:
- Loan to Cost (LTC) ratio: that is the loan amount as a percentage of total cost of the project including land value, building costs and establishment costs like architecture and engineering
- Loan to Value Ratio (LVR): this is the loan amount as a percentage of the value of the competed project

These vary between banks and you normally need to avoid exceeding both these. As a guide, the mainstream lenders will fund up to 70-80% of the LTC provided that it's no more than 60-70% of the LVR. Typically, you will need to provide 20 per cent of the funds for a 2 dwelling project and 30 per cent (or in today’s tougher lending environment up to 40 per cent) for larger projects, which lenders class as “commercial” loans. If your project falls outside these parameters don't worry, we have access to non-mainstreams lenders who can consider your requirements.

So for a simple 2 townhouse or duplex development,  you should be able to obtain a development loan at 80% LTC.

 

How to apply for a construction loan

There are a certain number of things you'll need to apply for the funding structure that you need. These include:

  • Details of your experience in this area, past projects completed and your own personal financial position and ability to cover cost over-runs

  • Project feasibility study - you've probably done one of these before you considered the project to see what profit you'd make

  • Copies of the stamped council approved working drawings

  • Copy of the planning permit

  • Copy of the specification and draft fixed price building contract

  • Details of your professional team i.e. builder, quantity surveyor, project manager, lawyer, architect & marketing agents

  • Copies of any pre-sales contracts (if applicable)

  • Copies of any agreements to lease (if applicable)

  • Copy of the contract for sale for the site 

  • Last 6 months loan statements for any existing lending facility secured against the site

This process can be quite time consuming, especially if you are busy running after other parts of the project. Our advisors specialise in this process, having competed their own construction projects over the last 15 years. Feel free to contact us to do all the leg work for you.
 

Stages of Construction Finance

Not unlike a regular residential new build loan, development loans offer staged payments to be finalised at the end of each regular building stage being;

  • the deposit,

  • base stage,

  • frame stage,

  • lock up stage,

  • fixing stage;

  • balance of development funds supplied on completion of the project

The percentages here will depend on the builders contract.

Development finance is different to ordinary investment finance as usually you can borrow the ongoing interest as part of your finance package.

This means you do not pay interest during the construction phase of your project, but the interest is capitalised.

In other words, the interest is added to the amount you owe at the end of each month and the next month you pay interest on the interest. However, you still won’t be able to exceed your total loan amount which will be, say, 80% of the development costs.

If you intend to retain your finished project, you would pay out the development loan by refinancing the property and taking out a long term investment loan.

What if you want to sell after the build?

If you're planning to sell once completed, the lenders will want some certainty that you'll be able to sell the property(ies) when completed unless you have other income streams that can service the end level of debt. People think that the only way to meet this requirement is to have presales. There are other ways but they are on a case by case basis so we recommend you contact us for more information.

That said, often the lenders will require a certain proportion of the properties to be pre-sold "off the plan" before construction commences. There are certain qualifying conditions that apply to pre-sales - generally these are:
- They need to be at arms length (i.e. not related or to an interested party)
- They need to be unconditional (other than  the property is to be completed within the specification proposed)
- They must have paid a minimum 10% deposit
They must have a sunset clause (typically 12 months beyond anticipated completion date)
- Overseas purchasers should  make up no more than about 20% of pre-sales

Ideally, to protect you, you'll get at least 100% of the total debt covered by qualifying pre-sales but if you're not quite there yet, then we can structure the deal to accommodate this as some lenders will accept 50% pre-sales for experienced developers with a proven track record.

By the way…you can’t use the funds from the pre sales to help fund your development – they have to remain held on trust.

 

 
Sources of Funding

Banks remain the major source of funding for developers and while most banks are keen to lend to experienced developers, however in the current stage of the property cycle, and in the wake of the 2018 Royal Commission into Banking, many of the major players are tightening their lending criteria.

As a result, second tier banks, private funders and joint venture funders are increasingly becoming a popular alternative for some developers.

Development and construction finance is an extremely complex field that requires specialised knowledge of not only the funding markets, but also the construction industry and commercial development. Knowing whether a particular development calls for bank or non-bank finance, mezzanine funding and the like comes with experience, and that’s why it’s vital to utilise the expertise of a financial consultant and broker like Just Business.

Keep in mind that if you are undertaking a large project, your financing may need to be split over more than one lender and in this case particularly, we can be of great benefit.

Private development financing refers to securing your construction funding from a third-party outside of the banks, most offering more flexibility for non-conforming developers. At Just Business, we have a network of private funders who specialise in competitive loans for developers – call us to find one that works for you!

Mezzanine Finance

Mezzanine finance for property development projects is advanced to a property developer to fund the gap between the first mortgagee’s facility limit and the property developer’s cash contribution to the project.

First mortgagees will traditionally lend 50% to 80% of total property development hard costs.

If a property developer has a 20% equity in the project and applies for a first mortgage loan of 80% of total project hard costs, then the Bank only approves 70% of hard costs, the property developer will require an additional 10% in funding to top up debt and enable the project to proceed.

Just Business will arrange Mezzanine Funding for property developers to top up over and above the first mortgage facility.

 

What is low doc development & construction lending?

Whether you’re building a 4-Unit Townhouse, a high-rise apartment, a hotel – or anything in between – securing construction finance is an integral part in getting your development off the ground.

However, most banks have stringent application processes and will request a range of documents related to your tax history, credit history, previous developments in your name, history of repayments and assets in order to assess your reliability as a borrower.

But at Just Business, we feel that this shouldn’t be an obstacle to helping your development begin. Our niche is providing high quality loans for developers, projects large or small, as well as assisting clients who don’t conform with bank policy for whatever reason, including:

  • credit issues

  • no financials

  • LVR parameters

  • A range of other factors!

What is a development loan broker?

A development loan broker is a broker who specialises in securing and structuring development funding, acting as an intermediary between the developer and a third-party – whether that’s a bank or non-bank lender.

Development loan brokers have in-depth knowledge of the various banks and what they offer, utilising specific information obtained from you in a consultation page to hunt down the best deal for your situation. At Just Business, the finance advisor you deal with was extensive knowledge of financing construction projects because they do developments themselves.

 

 

Benefit of using Just Business

We have access to wider and more specialized sources of funds than other construction finance brokers, merely as a result of our capabilities and applied volume in the market place.

We can arrange loan facilities that cover all facets of construction finance from the traditional 80% of cost funding through to more highly leveraged loans and equity placements.

We offer the following construction loan benefits:

- Competitive finance interest rates across the entire commercial mortgage product range;
- Fast turnaround times;all your commercial loan requirements;
- Flexible commercial property LVR’s, and other commercial finance terms and conditions;
- Non-bank commercial finance solutions;
- Access to non-bank private lenders;
- Flexible commercial loan servicing criteria; and
- Access to commercial loans based on valuation as opposed to purchase price.
- We offer a specialised range of tailored construction funding solutions for infrastructure projects – be it a large residential building site, industrial centre or mixed use property development.
- Our experienced team of professionals combined with leading industry access give us an industry edge.

Once we've established the project's feasibility and your plans for repayment or ongoing servicing of the facility, then we can get to work with the remaining information we need and start putting a detailed financial proposal  together for you. The benefit you'll gain by dealing with an experienced financier and developer will not only maximise your chances of success but also obtain you the most competitive terms as we work with multiple lenders to  find you the best deal.

We locate funding and financing opportunities, explain each thoroughly, develop the pro forma, complete the applications, and represent your best interests. It’s comprehensive. And effective.

 

 

So if you're ready to chat about your next project give us a call, we're happy to help.

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