Financing Three Townhouse Project

Hi All,

I have a small three townhouse development in Melbourne I am seeking some advice on how best to finance the construction component of the project.

Some rough figures:

1/Purchase price on Land (without planning approval) $580K
2/Existing Loan on Land $465K (80% LVR)
3/Fixed Building Contract for construction of $630K inc GST
4/Development Costs (planning, subdivision, utilities, contributions, drawings, engineering, consultants, interest on loans, holding costs on land, conveyancing, demolition etc) = 170K approx.

Note:
a/ intention is to build, refinance, keep & hold long term.
b/ $170K development costs will be paid in cash, of which about half has already been paid, the other half will be paid throughout the build time (not seeking finance for these costs).
c/not registered for GST as the intention is not to sell/claim back credits.
d/there are four parties (all related) on the title & the finance will be in all four names.

Main queries are:

-Max project debt will be $1.1m inc $58K of GST on the build. Can this be funded as a residential construction loan, separate to the existing loan on the land? Understand some lenders will not fund GST on building contracts.

-If it needs to be set-up as a commercial loan, will the bank have to payout the existing mortgage & refinance under commercial terms incurring higher rates/line fees etc on the full $1.1m or can it be setup to just cover the construction costs?

Any advice would be much appreciated. I have had some advice from a broker but it seems he doesn't really specialize in small developments..

Thanks.
 
Subject to lots of things where 4 parties are involved, a few lenders will do this with resi to 80 % lvr and at least one to 90 under dua.

Your biggest issue may be the Vals with most valuers taking 25 % off the end value until they are complete

On the surface looks doable on resi

Ta

Rolf
 
Try doing this on residential finance unless there is a need to go commercial (capitalising interest, short valuation, etc).

Plenty of lenders including St George, RAMS, Bankwest, P&N, NAB, etc.

80% is fine but if you are going to go into LMI territory then you will be severely limited in terms of lender and ability to fund the project.

Construction loan finance will include GST but you will not be able to fund the hard costs like DA, CC, Permits, etc. There are some builders that include some of these fees within the building contract.

The other thing to consider is the 4 names on the title. You just need to ensure that the application services using the aggregate incomes and liabilities.
 
Thanks for the advice. I will try residential first.

If we did need to go commercial, will a typical broker charge the client for their services or are they generally paid by the banks like residential? if so are thier commissions on commercial loans any higher than residential loans of the same value?

Broker I've spoken to hasn't suggested trying to complete as residential but moved straight down the commercial path. Wondering what his motivation is doing it this way?
 
I would try and find out why the broker is pushing you down commercial.
Its either cos he gets better commissions (more upfront) on commercial, or he knows something which we don't.
Maybe he is looking at commercial being able to include the soft costs in the finance app - however, even then looks like your LVR will be over commercial limits.
Perhaps your combined 4x salaries still don't service the debt, so maybe he is looking at commercial - which is easier to finance if its not self servicing
Resi you will be in LMI territory in any case, as you can't finance the soft costs.

Having 4related individuals on the title, and loans, shouldn't be a reason to go commercial.

If the plan is to build and hold long term, GST is pretty much a non-event for you. You pay GST as part of the build and it simply forms part of the development costs. Be clear on this, as if you decide to sell 1 (or more) before 5+years it becomes a change of purpose and gives your accountant heart burn.

Given the LVR's involved, I struggle to see how commercial would work anyway.

Blacky
 
Thanks for the advice. I will try residential first.

If we did need to go commercial, will a typical broker charge the client for their services or are they generally paid by the banks like residential? if so are thier commissions on commercial loans any higher than residential loans of the same value?

Broker I've spoken to hasn't suggested trying to complete as residential but moved straight down the commercial path. Wondering what his motivation is doing it this way?

Maybe he doesn't know that you can do 3 under residential or maybe he has got another agenda.

Brokers can charge on both residential or commercial finance when the customer is looking to build and sell within 24 months. They either charge a "clawback" or an upfront fee.
 
Almost certainly easier and cheaper to do this under residential.

This can be a bit of a fuzzy space, but the broker may not know that it can be done. Or there might be a concern about a clawback to the broker, they want to get paid but there's better ways of achieving a win-win than putting someone into an expensive loan.

Interesting some of the lenders that can work well and are competitive in this type of project, price point and LVR, don't actually have clawbacks. There are probably some fairly decent solutions here that word well for everyone.
 
Update

Thought I would give an update.
Thanks all for your responses.
I ended up switching brokers, only wish I had of sooner.
Ended up going with NAB as a residential construction loan.
Broker advised they'll lend on residential terms up to 4 townhouse developments.
 
NAB will only do 3 units on a single title. They do not do 4.

Also NAB will lend on "as is" valuation whereas St George will lend on end value (and do 4 units).
 
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