Construction finance

Hi

Can anyone offer information on how construction finance works for building units please?

I have heard you can borrow 60% of the construction costs (which I assume means you need 40% of the construction cost in equity or cash??)

Can you still get compound interest (to pay no interest until the end of project) or do you need to service it monthly?

Alternatively, I'm also very interested to know how the construction finance works if you presell the units. Would this mean you can borrow 100% of the construction costs if you have sold the units off the plan?

I appreciate any help!

Regards
 
Hi

Can anyone offer information on how construction finance works for building units please?

I have heard you can borrow 60% of the construction costs (which I assume means you need 40% of the construction cost in equity or cash??)
In traditional loans i.e loans based on construction costs you can get upto 80%

Can you still get compound interest (to pay no interest until the end of project) or do you need to service it monthly?


Alternatively, I'm also very interested to know how the construction finance works if you presell the units. Would this mean you can borrow 100% of the construction costs if you have sold the units off the plan?

Yes. There is something called gross realisation loan or equivalent which gives you a loan on the gross sales value of the project subject to certain conditions and I believe presales is one of the conditions.

In this case you may be able to get 100% of the project funded depending on your numbers.

I cannot see why interest cannot be capitalised as long as the Interest + principal falls under the acceptable LVR. However please double check this
 
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Hiya

Best to describe as

Development finance

Construct finance is generally more in the resi realm where you may do maybe 3 units / townhouses as a max.

Much depends if you have a need for a mainstream funder in which case GRV will be based around 65 to 70 % all in one line valuation. Its that one line val that gets many feasos unstuck

ta
rolf
 
There's two types of construction finance - residential and commercial. Presales are usually required for commercial finance (i.e. usually 4 or more units being built) to cover the debt but this can be waived if the client is strong enough and/or the debt is low. For commercial interest is usually capitalised until the project is finished. The major difference is that for a residential construction loan you have to show serviceability, whereas commercial you only need to show presales to get the deal done. Also commercial rates are higher but the LVR is quite similar in many respects.
 
Hi Duel,
Two questions.
1. How many units are you building on the land?
2. Do you currently own the land and have a mortgage on it?

When there is a small number units you can get a home loan type of product. These can be higher LVRs. I've done over 80% loans. But they are based on your capcity to service the on-going debt.

Alternatively you go for development finance (as per Rolf's comment). In this case you are looking for a loan based upon your exit strategy - ie how are you going to repay the debt. This is usually based on a sale and/or refinance exit and therefore pre-sales are key. You can capitalise the interest on these loans so loan servicing is not an issue. BUT costs are higher and interest is higher than you'd be used to with a home loan product.

The amount of equity you have in the land is a key part of structuring the finance.

Regards
Paul
 
Units

Hi

Thank you for your responses.

I have a block that can be developed into 12 units.

I have a mortgage at 80 Lvr on the land.

The commercial loan with capitalised interest sounds like my option - but can I still do this with 80 lvr on land?

Would the commercial rates be say 2% higher than resi?

How many presales would be needed to finance 100% construction costs?

The units would be strata titled but I guess it's one line until that happens..

Regards
 
You will be able to get 80% of hard costs or 60-65% of final value (minus GST) for commercial funding. So it is potentially possible but you would basically need to a) presell enough units to cover the entire land+build debt and b) probably put more cash into the deal via offering one of your other properties via a cross collateralisation or pulling out equity from other properties as cash contributions. Commercial banks hate undercapitalised and overstretched developers.
 
Sorry to ask another question but there's no point repeating what Aaron_c said.

When you say "units", are you talking about an apartment building being strata titled or townhouses on separate titles at completion? Might lead to something creative .. not sure through.

Regards
Paul
 
Hi

I was referring to apartments.

However I do have the option to build the apartments strata titled OR townhouses on seperate titles.

The apartments have a higher profit margin however it could be worth knowing about the townhouse option if it is more realistic!

(were you thinking to subdivide land first?)

Regards
 
It's an option. We've just done a loan for a client where they had 12 townhouses. They had the one builder do all 12 but they sold off 7 to individual buyers as land and construction packages. That meant 7 individual home loans. Then we arranged 5 loans for them spread across two lenders.

This meant the entire project was done with lower interest and lower cost home loans and the debt coverage was spread arround.

Might not work for you because you have highish debt on the land but the thing is some creative thought can find a solution.

Regards
Paul
 
Usually subdivision occurs after construction. The reason for this is that before subdivision can be undertaken all essential services on the land have to be put in like sewerage, driveways etc, which wastes time and holding costs if you are not building the units as well. It can work like Paul suggested but it's not common.
 
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