19 Feb Small Property Development Funding
Before you commence any development project, it is crucial to first establish how much you can borrow and how you will be able to manage all associated costs of the Small Property Development.
As a Small Property Developer you will have to understand finance and what the banks look for when lending for Small Property Development Projects.
Lenders look after their own interests first, so when deciding whether to finance your Small Property Development they will assess the risk, Starting with your ability to repay the loan, and then on the viability of the Small Property Development itself.
Banks don’t lend based on the security of the project alone; they will also look at the track record of the people behind the Small Property Development.
Until a good reputation with the bank and a sound track record in Small Property Development is established , lenders will assess your Small Property Development team.
It is important to submit your loan request in a professional manner, including a detailed feasibility study to show that you have allowed for all contingencies.
Generally your Small Property Development loan will be structured so the lender provides up to 70 to 80 per cent of the final cost of the project, rather than its end value and they will expect you as the developer, or your equity partners, to provide some funding, known as the Loan to Value Ratio or LVR.
This means if your total development cost is $1.5 million, your financier will expect you to contribute $300,000 to $450,000 of your own equity into the project.
Small Property Development loans offer 6 stages of payments to be finalised at the end of each building stage:
- Lock Up
- Balance of development funds supplied on completion of the project.
Small Property Development finance is different to ordinary investment finance as usually you can borrow the ongoing interest as part of your finance package, so do not pay interest during the construction phase of your project, but the interest is capitalised, 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.
When marketing and on-selling you Small Property Development Interest repayment would commence
Different types of lending for the stages of a project:
- An acquisition or development loan to cover the purchase, development application and pre-construction costs.
- A construction loan to cover the building of a project
An investment loan if you are retaining your project as a long term investment
Each of following points should be explored in detail in your application;
- Site description
- Design Concept
- Resume of your property manager and major consultants
- Feasibility study
- Projected sales figures
- Net result
SOURCES OF FUNDING
Banks remain the major source of funding for Small Property Developers and while most banks are more than happy to lend to experienced Small Property Developers, however the recent economic crisis in the global market has caused many of the major players re-evaluate their lending criteria.
Causing private lending and joint venture funders become a popular alternative for some Small Property Developers.
WHAT LENDERS LOOK FOR
- When assessing your development, Small Property Development Project lenders look carefully and critically at the security you are offering, their primary considerations are;
- The fire sale price, the result if they had to take possession as mortgagee and sell it?
- The end value of the dwellings you are Developing, if it higher than the median price in the area this is lower quality of security as the property may be more difficult to sell.
- Zoning – Residentially zoned land is highly regarded as it is the easiest to sell. Rural properties would be seen as less secure
- Lenders are hesitate against small apartments.
After all, a development can look wonderful on paper, but unless it ticks all of the right boxes with the banks, it will never even get off the ground.