Multi-unit development

[ReinDeer]

I am going to help my family to develop a 7 level 50+ units building (retails + apartments) in Sydney. I've already got the DA from Council and discussed with a mortgage broker who said the financial should be ok.

I've a full time job in another industry and I don't have any experience in property development. To reduce the risk, I am planning to sign a lump sum contract with the builder and hire a project manager to make sure the project is on time, within budget and good quality.

I am just wondering what risks are involved and how to mitigate the risks?

 

[Shahin_Afarin]

Doing that size development isn't just about financials - the lender needs to see that you have prior experience. The builder must be on the panel of the lender - you cannot just get any builder do to the build.

Also you are going to need presales - how many will be dependent on the lender and also a number of other things.

Here is a couple of things you will need:

Project Specific Information:

• Project Feasibility and Cashflow (ie: total project costings including land, construction, contingency, capitalisation of interest, council fees, professional fees, stamp duty etc)
• Resume/CV of the sponsors, specific to their development experience. Provide details of the last few projects (ie: address, description, Gross Realisation, Profit, cost/time to build –if there were overruns, how were they managed)
• Resume/CV of the Builder, with emphasis on similar size/scope developments. Provide details of the last few projects (ie: address, description, Gross Realisation, cost/time to build –if there were overruns, how were they managed)
• List of any other development projects either under construction or in the pipeline (including name of the funder and builder if applicable)
• Marketing Plans - if available
• Copy of any current pre-sales contracts - if available
• Copy of any Pre-Lease Agreement – for Commercial/Retail/Industrial developments
• Any current valuation on the land or project (Wish List)
• Any current Quantity Surveyor's Report on the project (again, Wish List)
• Construction Certificate (CC) – if available.

Development Finance Guidelines:

• If an external Builder is contracted (arm's-length) - The Bank will lend up to 80% of Direct Project Costs (DPC) ex GST and up to 65% of the Gross Realisation (ex GST), whichever is the lesser.
• If the borrower is an Owner Builder - The Bank will lend up to 75% of Direct Project Costs (DPC) ex GST and 60% of the Gross Realisation (GR) ex GST, whichever is the lesser. A contingency allowance of 10% is also factored in to the Bank's funding table.
• For Construct and Sell developments, a minimum of 50% of the proposed loan amount is to be covered by qualifying Net pre-sales (ie: net of GST and sales commissions) for loan amounts of less than $7,500,000.
• For Construct and Sell developments where the total lending amount is greater than $7,500,000, the Bank requires a minimum of 75% of the loan amount covered by qualifying Net pre-sales.
• For Commercial/Retail/Industrial developments, the Bank requires a minimum of 1.10 times hypothetical Interest Coverage of the loan amount from qualifying Committed Pre-Lease Net Rentals.
• Initial Land Banking funding is usually restricted to 50% of the purchase price or valuation amount, whichever is the lesser. If there is already a DA in place, then we can look at funding up to 60% of the market value. Interest payments are to be met by the applicant/s until construction funding commences. Construction to commence in the short term - usually within 6 months.
• PROFIT - The minimum net development profit expected by the Bank on projects: Residential/Commercial/Industrial – 15%, Land Subdivision - 20-25%.

 

[ReinDeer]

Shahin, thank you for the reply.

We own the land outright and my mortgage broker (who is experienced in multi-unit developments) has done an initial feasibility and cashflow analysis. The results seem ok at the moment and in the worst case my family is able to provide additional funding. We are planning to keep the whole building but we can sell some of them if it's required by the bank. We will talk to our broker again once we've the CC ready.

My main worry at the moment is the unforeseeable risks during the construction phase.

 

[Ace in the Hole]

Wow, you developing 50 units over 7 levels and keeping the lot !
Apart from owning the land already, you and your family must have some very serious equity and cashflow behind you to enter a deal like this.

Sound like you're not experienced with developing, so this is a huge project to start with.
Good luck with it.

 

[Terry_w]

My main worry at the moment is the unforeseeable risks during the construction phase.

Just sit down and make a list of everything that could possibly go wrong. In fact better to do it here and we can add things you may miss.

 

[Sailesh Channan]

Hire a good project manager and they will be able to mange the whole process for you.

The key is to do a proper feasibility analysis which looks into type of units/ retail that works for the area and expected end values vs development costs.

Most banks want to see 20% plus development margin. Also add the current value of the land into your feasibility to get a realistic profit margin.

For a project of this size I would usually charge $200k.

 

[ReinDeer]

Just sit down and make a list of everything that could possibly go wrong. In fact better to do it here and we can add things you may miss.

Terry, here is list of the risks I can see:

• Overtime due to weather, etc.
• Over budget (but I hope this is not a major problem as I am going to sign a lump sum contract with the builder).
• Builder bankrupt?
• Quality issues (e.g. the material used does not follow what's in the contract).

 

[Shahin_Afarin]

Shahin, thank you for the reply.

We own the land outright and my mortgage broker (who is experienced in multi-unit developments) has done an initial feasibility and cashflow analysis. The results seem ok at the moment and in the worst case my family is able to provide additional funding. We are planning to keep the whole building but we can sell some of them if it's required by the bank. We will talk to our broker again once we've the CC ready.

My main worry at the moment is the unforeseeable risks during the construction phase.

The biggest risk to your project is going to be the cost of construction. You need to ensure that the Hydraulic and Structural Engineer doing the CC drawings is the best the game. A 10% variance in the use of steel or concrete can make a huge difference in your cost/profit.

 

[Terry_w]

Rather short list!

Think of the 4 disasters that can happen to individuals
1. death
2. incapacity
3. insolvency
4. family law

Now apply these to each individual involved in the project.

The builder will probably be a company. But what could happen if the person behind the company suddenly died? Are there others in the company who could continue one. What if the project manager died? It may be a simple case of just finding a new one, but just go through all the issues.

Consider the family side too. How is the land owned? If through a discretionary trust then how is the succession of the trust structured. Who is the appointor and what happens if they die?

If a unit trust then what if the person controlling the trustee dies, what if a unit holder dies...

What if uncle Joe goes through a divorce - can mrs Joe slap a caveat on title and what effect would this have on finance mid way through.

etc

Perhaps you need to make a word document with a table and go through each risk on one column and then list what possible effects these could have.

 

[ReinDeer]

Rather short list!

Think of the 4 disasters that can happen to individuals
1. death
2. incapacity
3. insolvency
4. family law

Now apply these to each individual involved in the project.

The builder will probably be a company. But what could happen if the person behind the company suddenly died? Are there others in the company who could continue one. What if the project manager died? It may be a simple case of just finding a new one, but just go through all the issues.

Consider the family side too. How is the land owned? If through a discretionary trust then how is the succession of the trust structured. Who is the appointor and what happens if they die?

If a unit trust then what if the person controlling the trustee dies, what if a unit holder dies...

What if uncle Joe goes through a divorce - can mrs Joe slap a caveat on title and what effect would this have on finance mid way through.

etc

Perhaps you need to make a word document with a table and go through each risk on one column and then list what possible effects these could have.

Thanks Terry.

The land is owned by a company. We've considered some of the items such as death and my family members (who are the owners and directors of the company) has prepared a will just in case. I will reconsider the items in your list.

 

[Terry_w]

Thanks Terry.

The land is owned by a company. We've considered some of the items such as death and my family members (who are the owners and directors of the company) has prepared a will just in case. I will reconsider the items in your list.

In that case you have to consider the 4 disasters for all the directors and shareholders.

Imagine if the majority shareholder became incapacited and their attorney took control of their affairs. Could they take the company down a different path? What if one or more shareholders died leaving their shares to someone else.

And my list wasn't exhaustive but just a few of the many things to consider.

And lawyers need to focus on what can go wrong, but you need to think about what can go right. Is a company the best way to hold hte land and the development. Could a restructure be in order, and if so when would be good to do this? possibly as early as possible before the value gets too high. There are also some new CGT exemptions for restructuring announced in the recent budget.

 

[Scott No Mates]

Risks:
Latent conditions - what has been done to date for geotech? What is the soil profile? Where's the rock? Is it stable or floaters? What are you going to do to mitigate risk in the ground?

What form of contract will be used? Is your artichoke or PM going to advise?

What contract will your consultants operate under? What will be their ongoing involvement?

Who is doing your cost planning? Have you engaged a qs or used a finger in the air?

There are plenty of construction risks as well as non-construction risks: eg time (meeting all statutory obligations for approval of the development/ occupation/ regulatory etc, L&E court challenges), interest rates, fx (if overseas funded or construction costs are based on imported equipment eg lifts) etc.

 

[mflying]

Doing that size development isn't just about financials - the lender needs to see that you have prior experience. The builder must be on the panel of the lender - you cannot just get any builder do to the build.

Also you are going to need presales - how many will be dependent on the lender and also a number of other things.

Here is a couple of things you will need:

Project Specific Information:

? Project Feasibility and Cashflow (ie: total project costings including land, construction, contingency, capitalisation of interest, council fees, professional fees, stamp duty etc)
? Resume/CV of the sponsors, specific to their development experience. Provide details of the last few projects (ie: address, description, Gross Realisation, Profit, cost/time to build ?if there were overruns, how were they managed)
? Resume/CV of the Builder, with emphasis on similar size/scope developments. Provide details of the last few projects (ie: address, description, Gross Realisation, cost/time to build ?if there were overruns, how were they managed)
? List of any other development projects either under construction or in the pipeline (including name of the funder and builder if applicable)
? Marketing Plans - if available
? Copy of any current pre-sales contracts - if available
? Copy of any Pre-Lease Agreement ? for Commercial/Retail/Industrial developments
? Any current valuation on the land or project (Wish List)
? Any current Quantity Surveyor's Report on the project (again, Wish List)
? Construction Certificate (CC) ? if available.

Development Finance Guidelines:

? If an external Builder is contracted (arm's-length) - The Bank will lend up to 80% of Direct Project Costs (DPC) ex GST and up to 65% of the Gross Realisation (ex GST), whichever is the lesser.
? If the borrower is an Owner Builder - The Bank will lend up to 75% of Direct Project Costs (DPC) ex GST and 60% of the Gross Realisation (GR) ex GST, whichever is the lesser. A contingency allowance of 10% is also factored in to the Bank's funding table.
? For Construct and Sell developments, a minimum of 50% of the proposed loan amount is to be covered by qualifying Net pre-sales (ie: net of GST and sales commissions) for loan amounts of less than $7,500,000.
? For Construct and Sell developments where the total lending amount is greater than $7,500,000, the Bank requires a minimum of 75% of the loan amount covered by qualifying Net pre-sales.
?
? Initial Land Banking funding is usually restricted to 50% of the purchase For Commercial/Retail/Industrial developments, the Bank requires a minimum of 1.10 times hypothetical Interest Coverage of the loan amount from qualifying Committed Pre-Lease Net Rentals. price or valuation amount, whichever is the lesser. If there is already a DA in place, then we can look at funding up to 60% of the market value. Interest payments are to be met by the applicant/s until construction funding commences. Construction to commence in the short term - usually within 6 months.
? PROFIT - The minimum net development profit expected by the Bank on projects: Residential/Commercial/Industrial ? 15%, Land Subdivision - 20-25%.

Thanks for detailed post.

DPC and GRV are widely interpreted words with different lenders. can you please give a small example of DPC and GRV are calculated and used by lender for funding calculation?


Also,
you mentioned
For Commercial/Retail/Industrial developments, the Bank requires a minimum of 1.10 times hypothetical Interest Coverage of the loan amount from qualifying Committed Pre-Lease Net Rentals.

what about residential development?

is it possible to capitalized interest while building??

 

[ReinDeer]

Risks:
Latent conditions - what has been done to date for geotech? What is the soil profile? Where's the rock? Is it stable or floaters? What are you going to do to mitigate risk in the ground?

What form of contract will be used? Is your artichoke or PM going to advise?

What contract will your consultants operate under? What will be their ongoing involvement?

Who is doing your cost planning? Have you engaged a qs or used a finger in the air?

There are plenty of construction risks as well as non-construction risks: eg time (meeting all statutory obligations for approval of the development/ occupation/ regulatory etc, L&E court challenges), interest rates, fx (if overseas funded or construction costs are based on imported equipment eg lifts) etc.

Thank you for the comments.

We've managed to get the Development Approval from Council last year and part of the DA submission includes a geotechnical report, QS cost estimate, etc.

I am going to work with my architect to get the CC at this stage and we are going to sign a lump sum contract with the builder to minimise the budget risk.

Interest rate is another risk that I've considered but since we are planning to keep most if not all the units (I understand this will depend on the bank's requirement), hopefully interest rate won't be a major issue. In the worst case my family can provide additional fund to finish off the project.

I guess my major worry is the quality - how to make sure the material used follows what's in the contract.

 

[Scott No Mates]

Following the contract documentation, specifications and drawings are monitored by the architects & pm keeps the project on programme.

 

[Sailesh Channan]

Choose a reputable builder that builds a number of units a year. This means they will have the specilalised trades that is relevant to unit construction.

Hire a quantity surveyor for each progress draw and a good project manager that can deal with complications that arise during the construction process as architects do not cover every aspect of the build.

Complication will arise early into the project and usually involves dealing with neighbours and a good project manager will be able to geal with these issues as the builder will probably stop work and delays will start to mount.