Development Finance Starter Guide

Development Finance Starter Guide

ADS’s guide for financing development sites such as houses, townhouses, apartments and commercial properties.

Four Key Steps of Property Development

Step 1:

In development finance, the borrower prepares information for lenders including a feasibility analysis showing land purchase costs, constructions costs, gross realisation value and the expected development margin.

Step 2:

A private lender who is interested in the project will issue indicative terms including interest rate pricing, a line fee on undrawn funds, LVR parameters and required pre-sales before draw-down of funds for the development.

Step 3:

Assuming the borrower and lender are happy to proceed, a formal letter of offer is agreed which requires the borrower to pay for due diligence costs of the lender such as a valuation report for the property (which may include uplifts in value for obtaining a DA for the site) and a QS Report that confirms the construction cost estimates provided by the borrower are realistic.

Step 4:

Post the lender due diligence period, formal loan documents are ordered by the lender once the borrower has paid the legal costs of having these documents issued for the construction financing.

 

What to Watch out for in the Property Development Market:

1. High lender upfront due diligence costs

It is important that the borrower has a good understanding of all upfront fees and charges before commencing a development financing process with a private lender to ensure there are no hidden costs or surprises for them once they have already started to pay for some upfront charges.

2. Track-record of the lender

The borrower should ask to see a list of projects previously financed by the private lender and have the ability to speak to some of the previous borrowers the private lenders has financed to ensure they have good experience in this area.

3. Costs of project delay

Given the risk of project delays, borrowers should look carefully into what ‘Event of Default’ triggers exist in the loan agreements as this could materially effect whether any default interest can be applied to the project. Default interest rates can be 100% higher than the agreed cost of funds so it is important borrowers are adequately protected in their position due to project delays.

Other Areas of Interest

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