Lending for commercial construction (5 storey office block)

Discussion in 'Commercial Property' started by albanga, 23rd Mar, 2015.

  1. albanga

    albanga Member

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    Hey Brokers,
    What sort of things do you need to consider from a lending perspective for the construction of a 5 storey office block.
    Questions including LVR, Intetest rates, lenders that will do it, what sort of security and paperwork they require.etc

    I understand this is a whole new beast to the resi lending I am familiar to.

    And starting info would be much appreciated.
     
  2. Shahin_Afarin

    Shahin_Afarin Finance Broker

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    You are right is a completely different beast - we would need to know the following as a starter:

    1. Who is the builder? What is their experience? Are they a gold builder or on the lender's preferred builder list?

    2. What is the experience of the client? What sort of experience do they have in developing office blocks?

    3. What is the risk profile of the client? Asset and Liability position, cash surplus, servicing, etc.

    4. What does the SWOT analysis from the valuer tell us about the development?

    5. LVR would most likely be 50% w/ presales essential

    6. Impossible to quote interest rate without determining the above points but to give you a guide - it would be anywhere from low 6's to high 9's. This is all dependent on the overall risk profile and how much margin the lender will place on the base rate. The lower your LVR, the lower the rate.

    7. Security - bank may request residential security (not crossed but held with bank). This is very dependent on the strength of the "deal"

    This is some very basic points and this sort of application would be complex.
     
  3. albanga

    albanga Member

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    Hi Shahin,

    Thanks for your quick and detailed response.

    Will the LVR be based on land+build contract price?
    Or can it be assessed on completion and comparable value based on rental yields?
    For example exactly next door is a tenanted 5 storey office block on a similar block size so it would be expected a similar return could be achieved.

    Also you mentioned pre-sales but the idea would be to build and hold. Does this mean you would perhaps need a tenant agreement in place as a basis of "pre-sales"?
     
  4. Shahin_Afarin

    Shahin_Afarin Finance Broker

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    LVR will be based on end value. Commercial valuation are more complicated and comprehensive than standard resi valuations. One of the big things that the valuer takes into consideration when valuing commercial properties is the anticipated yield.

    Re presales - if the idea is to build and hold then this will eliminate a lot of lenders. With the remaining lenders you will need to show that you can service the debt without the use of the proposed rental income and this can be tough so you would require unbelievable borrowing capacity/income or (more likely) a reduction in the loan amount and thus LVR.

    So I don't think LVR is going to be an issue for you - it will be the income/borrowing capacity side of things.
     
  5. Shahin_Afarin

    Shahin_Afarin Finance Broker

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    Also depending on the scale of the project - the builder would need to be on the panel of the lender. Otherwise we would need to organise a introduction whereby the builder presents themselves to the lender and joins their panel (this is a full blown preso).
     
  6. albanga

    albanga Member

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    Well thanks for knocking the wind out of our sails Shahin ;)

    No thank you very much for your detailed responses. As suggested going off that then I am also pretty confident LVR would not be an issue.

    The serviceability concern I imagine could be overcome with the correct structure and backed by a few investing partners.

    This is still very early days but you have given me much to think about.

    Thank You for your time.
     
  7. Shahin_Afarin

    Shahin_Afarin Finance Broker

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    Adding more applicants to the mix may be great for servicing but commercial lenders do not like this particularly based on what you are doing.

    Not sure how you can overcome servicing with "correct structure" as the deficit would be huge. You will need a little more than correct structuring.
     
  8. caferacer

    caferacer Member

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    Mate most lenders should do 65% on - comp.
    You just need to ensure that there is adequate pre-leasing commitments before constructions commences. This also reduces your risk and will make the asset more attractive for sale.
    If you have a wiley lender they maybe able to add in tenant incentives i.e fitout into you hard costs.
    Cheers