development finance - presales as deposit
- Thread starter barra
- Start date
Depending on the nature of the development, you'll be subject to commercial or residential lending criteria.
Pre-sales don't matter so much for residential, it's your long term affordability and some deposit will be required.
For commercial, it's more about the deal than affordability. Pre-sales is used as a criteria to demonstrate the loan will be repaid at the conclusion of the project. Lenders will also need to be confident that you can complete the project successfully, so experience counts.
In most cases, they do want you to put some of your own money on the line, so you'll be needed some sort of deposit. Most lenders won't give you more than 80% of the fixed costs (the cost of the land plus the cost of the build). They'll also restrict you to about 65%-70% of the end value. Choose whichever figure is lower.
In a nutshell you will have to put some money into the deal. This could be your own cash, the deposits from the pre-sales or equity you've got elsewhere.
A really good ongoing relationship in terms of completed deals with the lender might also get you around this problem, but if they'd have probably already discussed this with you if you were in this position
Pre-sales don't matter so much for residential, it's your long term affordability and some deposit will be required.
For commercial, it's more about the deal than affordability. Pre-sales is used as a criteria to demonstrate the loan will be repaid at the conclusion of the project. Lenders will also need to be confident that you can complete the project successfully, so experience counts.
In most cases, they do want you to put some of your own money on the line, so you'll be needed some sort of deposit. Most lenders won't give you more than 80% of the fixed costs (the cost of the land plus the cost of the build). They'll also restrict you to about 65%-70% of the end value. Choose whichever figure is lower.
In a nutshell you will have to put some money into the deal. This could be your own cash, the deposits from the pre-sales or equity you've got elsewhere.
A really good ongoing relationship in terms of completed deals with the lender might also get you around this problem, but if they'd have probably already discussed this with you if you were in this position
Thanks for the reply.
Ok, a little more detail. It's 10+ units. Da approved so there isn't a huge amount of soft costs left. Conservatively I see 23% profit.
I can only contribute contribute around 1.5%.
Even if I pre sold all with 5% cash deposit I'm still short of 20+%.
I understand hurt money but is there another way to break into developments of this size?
For eg:
5% deposits from 100% presales (5% of end value which is about 6% of costs.)
Plus
My 1.5% (of costs, about 1.2% of end value)
Plus
The 23% profit ( of end value)
That leaves me chasing about 71.5% of end value or about 88% of costs.
Do I have any chance of a 70% grv loan?
Or could I get a 100% loan if I secure 80% presales so the lender can see their payday and its just my profit left for me to Chase?
My sums have finance costs and contingency included.
Input is very much appreciated.
Thanks
John
Ok, a little more detail. It's 10+ units. Da approved so there isn't a huge amount of soft costs left. Conservatively I see 23% profit.
I can only contribute contribute around 1.5%.
Even if I pre sold all with 5% cash deposit I'm still short of 20+%.
I understand hurt money but is there another way to break into developments of this size?
For eg:
5% deposits from 100% presales (5% of end value which is about 6% of costs.)
Plus
My 1.5% (of costs, about 1.2% of end value)
Plus
The 23% profit ( of end value)
That leaves me chasing about 71.5% of end value or about 88% of costs.
Do I have any chance of a 70% grv loan?
Or could I get a 100% loan if I secure 80% presales so the lender can see their payday and its just my profit left for me to Chase?
My sums have finance costs and contingency included.
Input is very much appreciated.
Thanks
John
Most people tend to break into this sort of development by doing a few smaller projects first. By doing this, they build up funds, experience and a track record.
Most developers won't even consider a deal unless there's a 20% profit in it, after all the costs in the project, simply because even with DAs it's very easy for there to be a cost blowout completely outside of the developers control. There is where the experience to mitigate these risks comes into it.
This deal might be possible if you can find an experienced developer to do it with as a JV partner.
Most developers won't even consider a deal unless there's a 20% profit in it, after all the costs in the project, simply because even with DAs it's very easy for there to be a cost blowout completely outside of the developers control. There is where the experience to mitigate these risks comes into it.
This deal might be possible if you can find an experienced developer to do it with as a JV partner.
Hi Barra,
I've been involved in a couple of development deals over the last 6 months. The most I've seen a lender go to was 80% on total development costs and the developer had 110% debt cover with pre-sales.
I agree with PT_Bear, you need a JV partner to put some cash into the project, unless you have some hidden equity in some other investment properties or your PPR? Even then you will probably struggle as lenders are looking for developers with experience, they are basically cherry picking the best deals at the moment.
Cheers.
I've been involved in a couple of development deals over the last 6 months. The most I've seen a lender go to was 80% on total development costs and the developer had 110% debt cover with pre-sales.
I agree with PT_Bear, you need a JV partner to put some cash into the project, unless you have some hidden equity in some other investment properties or your PPR? Even then you will probably struggle as lenders are looking for developers with experience, they are basically cherry picking the best deals at the moment.
Cheers.
a) Mez funding? Problem is it wipes out the profit as they will want 25% +
b) JV partner. Problem is they want 50% of profit for putting in the 20% of TDC and doing no work!
Its tough.
b) JV partner. Problem is they want 50% of profit for putting in the 20% of TDC and doing no work!
Its tough.
Thanks for all the responses.
I have heard that lenders are scared of jvs. But I have no experience with jvs. Is this true or are they an acceptable and normal part of multi million $ deals?
To be honest I'm not even sure where to start looking for a jv. Any input? What sort of extra costs are involved if I can find one? Is it just a matter of a few contracts and extra lawyer time?
Thanks
John
I have heard that lenders are scared of jvs. But I have no experience with jvs. Is this true or are they an acceptable and normal part of multi million $ deals?
To be honest I'm not even sure where to start looking for a jv. Any input? What sort of extra costs are involved if I can find one? Is it just a matter of a few contracts and extra lawyer time?
Thanks
John
My real suggestion is start with something smaller like 2-3 units, that you can do on your own with a 90% LVR under residential. If you're still learning to swim, don't jump in the deep end with the sharks.
Depends on the lender and their policies. Usually about 3-4 units on a single title. The specifics of the deal or your needs might put it into commericala as well.
Mez finance as mentioned earlier is not seen by banks as it used to. They don't like it. I wouldn't go down the Mez finance route. Get a partner. Find someone who would be willing to put equity in. You do the hard work, they make some money and you make money off a very small input.
hi
10 +
whats the +
1.5% hurt money and under 100% presales in this market just is not going to sail
alot of lenders are asking 110% of their money allowing for a 10% movement in the development time frame
equity partner
you will be looking at 50% share and 23% margin does not look good even then
any lender wants 21% profit margin and thats after 110% dedt coverage in presales and they have to be arms lenght pre sales.
jv can work but with you at 1.5% thats not a great point for you
where is the jv
a jv is
say 25% each 0r 33% or 50%
where is the jv when you are putting up
1.5 % of costs
lets say the cost are 2.5 mil 10 unit(with out the plus)
10% is 250k
1% is 25k
now look at the development cost
2.5mil less 66% is 820K thats what a jv partner is throwing in
so you put up 25k I put up 800k and we get 50% each
am I missing something here
is this a good deal
yes if I am the 25k guy
to get a jv person even thinking (forgetting the 23%margin)
you need to throw in 400k
and that my friend is about 10 or 15% of costs
unless the land is freehold and no debt
then thats a very different bag of fish
oh and 10+ is not a small development
you can have a blow out of 400k very quick
have no idea where this property is
but the numbers are the most important thing and from my looking at it unless I can't read correctly sounds like a development that is being done with a large cashflow behind it
and those are a just not done anylonger
b unless you have hell of alot of experience is like walking into a live land mine area wearing ronald macdonald shoes and looking for hamburglar
you may find that 23%
or it could all blow up very easily
and I have no investor that would think of going into that mine field not at 23%
35 or 40% thats very different
even then they want 10 to 15% on the table and they cover the rest
10 +
whats the +
1.5% hurt money and under 100% presales in this market just is not going to sail
alot of lenders are asking 110% of their money allowing for a 10% movement in the development time frame
equity partner
you will be looking at 50% share and 23% margin does not look good even then
any lender wants 21% profit margin and thats after 110% dedt coverage in presales and they have to be arms lenght pre sales.
jv can work but with you at 1.5% thats not a great point for you
where is the jv
a jv is
say 25% each 0r 33% or 50%
where is the jv when you are putting up
1.5 % of costs
lets say the cost are 2.5 mil 10 unit(with out the plus)
10% is 250k
1% is 25k
now look at the development cost
2.5mil less 66% is 820K thats what a jv partner is throwing in
so you put up 25k I put up 800k and we get 50% each
am I missing something here
is this a good deal
yes if I am the 25k guy
to get a jv person even thinking (forgetting the 23%margin)
you need to throw in 400k
and that my friend is about 10 or 15% of costs
unless the land is freehold and no debt
then thats a very different bag of fish
oh and 10+ is not a small development
you can have a blow out of 400k very quick
have no idea where this property is
but the numbers are the most important thing and from my looking at it unless I can't read correctly sounds like a development that is being done with a large cashflow behind it
and those are a just not done anylonger
b unless you have hell of alot of experience is like walking into a live land mine area wearing ronald macdonald shoes and looking for hamburglar
you may find that 23%
or it could all blow up very easily
and I have no investor that would think of going into that mine field not at 23%
35 or 40% thats very different
even then they want 10 to 15% on the table and they cover the rest
You're going to have some trouble, but I don't want to dissuade you from trying - go out there and hammer it, sometimes you never know.
What I will say though is that some of my developer friends are having trouble finding finance even with 10% deposit and 30%+ profit with extensive development experience.
Good luck though, sincerely I love seeing little guys win (I am a little guy myself )
What I will say though is that some of my developer friends are having trouble finding finance even with 10% deposit and 30%+ profit with extensive development experience.
Good luck though, sincerely
I love seeing little guys win (I am a little guy myself )Oh I forgot to say, if you're having trouble getting your development off the ground and are looking for a JV partner, something that you can do is to approach a builder with a set of preapproved plans/expressions of interest from buyers/preferably sales contracts and say "take the land and give me x number of units in exchange upon completion" with whatever figures you work out.
It's something that happens quite often in this town, particularly with elderly/non investors sitting on prime development land who don't want to take any risk. Probably a better option than sitting on the land indefinitely bleeding interest and heartache, or selling at a loss
It's something that happens quite often in this town, particularly with elderly/non investors sitting on prime development land who don't want to take any risk. Probably a better option than sitting on the land indefinitely bleeding interest and heartache, or selling at a loss
if he owned the land outright he would have the equity to do the job himself.
I would say this deal is just too skinny in todays environment
true, but my point is that it would be better to convert the land over to a finished apartment with a little equity that bears income rather than be heavily indebted in limbo for years
