When the world's financial economies went into "melt-down" as a result of the Global Financial Crisis (GFC), one of the hardest sectors to attain finance has been with major construction and development projects. What has become more relevant over the last couple of years is that "the funding sources create the rules, and in order for you to receive funding, you and I have to work within the rules".
Banks and lending institutions within Australia have tightened up their lending policies and guidelines to an extent where their risk is at an absolute minimum when it comes to lending money on major development and construction projects. This can make it very difficult indeed for a developer to get the finance they need to undertake some of these large projects. So what are some of the main factors these banks and lending institutions look for?
The lender requires confidence in the developer to be able to cost and efficiently construct the project. Previous experience will be well regarded.
Some equity from the developer will be required to start the process. The amount of deposit will be determined on a case by case basis.TDC (as below) may apply and presales may also be a requirement.
The location of the development may also become a major factor in determining "Risk" for the Lender. Some areas in each state are not looked upon as "desirable" or "economically viable"
Traditionally, "Total Development Cost" (TDC) has been the banks and other funders standard method of funding. Basically, this is where the funder would lend a percentage of the TDC up to a maximum of 80%
This type of funding is becoming more widely used as the developer may have access to more funds with different lending policies to the Banks. It is not unusual for the interest rate to be higher with this type of funding, however, it does provide a "means to an end". The experience, equity and location factors (as above) still apply here, however, the most common method of funding here is by way of Gross Realisable Value (GRV). This method of finance is based on the end value of the project, on a cost to complete basis.GRV finance is generally less stringent requiring minimum or no presales. The maximum LVR for this type of facility is 70% of GRV.
In relation to land settlement, the loan cannot exceed 70% of the value of the land "as is". Should a property be acquired without the relevant DA approvals, and the developer put in place the appropriate DA approvals adding significant value to the land, it may be possible to borrow 100% of the land and development costs. Alternatively, should a developer acquire an approved development site, it would mean that they would need to provide at least a 30% deposit of the "as is" value of the land. Assuming that the borrowings do not exceed 70% of GRV, the entire project would be fully funded from this point.
EZ Finance has many sources of non bank and private funders and by utilizing the GRV method, a property developer is generally able to borrow more money against their project, minimising their equity outlay.
Our commercial managers are in constant contact with banks and high net worth Investors located in many countries overseas. Our sources in India, China and the US are just starting to release funding for investment in Australia as we are seen to be a safe country in which to invest. Places like China have national laws which only allow their people to own a property for a capped time period, so they are not able to keep the property permanently. Chinese investors see Australia as a good permanent investment option.
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