Project finance

[Nominees]

Hi Everyone,

I need some advice on how to ask the bank to finance a project.

This is a bit different from you normal loan using a property as security. What I need is the bank to lend me money to do a project.

i.e.
1) Buy the land
2) Build 2 apartments

Obviously ONCE the project is finished there will be security, but how do I get the money in the first place?

I will most probable sell the bottom apartment (to pay back the bank) and keep the 2nd one.

This is more of a business deal and I will operate under a company (trust) structure.

I believe I need a "project plan" to show the banks. Give them all the figures etc... so that they will aprove the deal.

What I would like to know is:

- Has anyone done this before?
- What do the banks want to see?
- Any good advice (how to write the plan, what to include etc...)
- Which bank is best suited for this?

Thanks,
Nom

 

[Simon]

You should find a broker who has experience in this sort of thing. One less headache for you and most brokers wont charge you anything for their service.

Try Rolf at www.asapfinancial.com.au. He has an great reputation on this forum.

All the best!

 

[Nominees]

Hi Simon,

Thanks for your post.

Rolf if you can help me with this one please PM me! (Or reply to this post.)

Cheers,

Nom

 

[Amedeo]

Nominees,

You are best recommended to approach a Commercial Mortgage Originator, as this is the finance you are seeking. Examples are Balmain NB (whom I work for by the way!) or Ashe Morgan Winthrop. Banks also can do this.

To answer your question about whether this finance is do-able, the answer is yes! This is common everyday development finance.

The security for the transaction is initially the land, and upon completion, the development itself.

There are many factors though, such as:

Your experience as a developer.

How much equity or cash you are putting into the deal (and therefore the Leverage you require.

Property location etc etc.

Hopefully this will get you started!

 

[Kevmeister]

I have no doubt the strategy is entirely different but keep in mind ordinary people do the same thing (in concept) every day when they go to the bank to get a loan to build their dream home. In your case, however, you are a developer/investor.

When our house was built 7 years ago after each major milestone of construction (eg. slab, frame, lockup, fitout, completion, etc), the bank performed an inspection prior to paying out. They paid the builder directly, or gave you a bank cheque to forward to the builder. You never touched the funds.

I guess it would be a bit different if you were an owner-builder, or renovating etc.

 

[Rolf Latham]

Hiya

Late in on this one.
Many lenders would do this as a straight resi construct.

Proviso is that you have equity and serviceability to do the deal.

Ta

Rolf

 

[Nominees]

Good to see the thread active again
(Thanks Amedeo!)

I spoke with someone from NAB (over the phone) and they said there shouldn't be a problem.

This is what He said. Get plans through council. Sell the first apartment (town house) off the plan. Once you show us the OTP contract of sale and put in some of your own money we will lend you the money to do the deal.

OK fine... HOWEVER after thinking about this I found some problems (I understand selling off the plan etc... no problem with that. ) The problem is:

1) The land does NOT belong to me. (I have to buy it)

2) The vendor wants their money soon.

3) And even if I could get them to wait (by giving them a good initial deposit.) How can I sell something off the plan if the land does not belong to me?

So to summarise the situation. I do have some money to put into the deal but don't have enough to buy the block of land. (I can put in 1/3 of the price.)

So I need the bank to lend me the money to buy the other 2/3 of the block and then enough to build 2 town houses on it.

The up side of this deal is that once I sell one town house, it will pay for the WHOLE project....

So what is the verdict?

(Thanks for all the previous posts, keep them coming...)

Cheers,

Nom

 

[Gill Bates]

Some ideas,

Redo ur calcs to see if u could offer the vendor a incentive ( higher price ) if they will wait longer.

And/Or

Also , find out (carefully ) why the vendor wants to sell the land. It may turn out they only immediately need 10-20-30K for OS holiday or home improvements or car etc?

Re
How could u sell something off the plan , without owning it .

Developers do it all the time. Developers cancel OTP contracts , the major dev planned for somewhere on the coast by Craig Gore ( where their where to be no children ) has just been cancelled and all people who bought OTP will get their deposit back. So I guess u have to have the right terms in the contract.


Also
Near me in Buranda, Brisbane, a developer has purchased about 7 house in a row. They would have all been conditional contracts.

 

[Nominees]

Hi Gill,

How could u sell something off the plan , without owning it .

Developers do it all the time. Developers cancel OTP contracts , the major dev planned for somewhere on the coast by Craig Gore ( where their where to be no children ) has just been cancelled and all people who bought OTP will get their deposit back. So I guess u have to have the right terms in the contract.

Ok this is interesting... So could I submit plans to council without owning the land? and once it comes out of council to sell of the plan?

I guess I can tell the vendor that I will pay for the plans and the coucil fees.. however they may well sell the block to someone else in the means time (especially if it takes 5 to 7 weeks to come out of council).

Nom

 

[beech]

I believe you could take out an OPTION on the property.

Goes something like this:

agree to pay full or negotiated price with vendor with an extended settlement giving you time to get development approval with council.(vendor cant sell to anyone else while you hold option to buy).

you would also have to pay an option fee of maybe 2.5% of neg price(eg 2.5k/100k site)which the vendor will take off at settlement(97.5k owing)if in fact you go ahead with purchase.
you would forfeit the 2.5k if you decide NOT to go ahead for what-ever reason.

once DA approved this site should also be valued higher.

you could then set a date for settlement now you have everything ready to start building.

arrange finance and maybe advertise 1 unit for sale OTP.


BTW dont count on DA in 5-7 weeks from what ive read or spoken to people about,anything up to 12 months sometimes longer.

keep us up to date with your situation

also Joannak is involved in development,im sure she could tell you more than me.


Beech

 

[JoannaK]

Beech,

you've pretty much hit the nail on the head.

This is how we do it:

we negotiate the purchase of the land, SUBJECT TO COUNCIL APPROVAL FOR X UNITS AND CARSPACES.

Subject to council approval basically means that if the DA takes 6 months or 12 months doesn't matter, we settle when we get the approval on our desk. If we don't get the approval we are seeking we simply walk away.

We exchange contracts on a 2.5% deposit. Our argument to the vendor is that "there is no point paying a higher deposit when it's only going to sit in a solicitors trust account doing nothing...you can't touch it, and neither can I. We'd much rather use the extra money to pay for all the consultants necessary to prepare the DA for us....and if we, for whatever reason, don't complete, you will own all that we have done to date...at no cost to you....and that will only assist in increasing the ultimate value of your property should we not complete the sale".

We draw up plans and submit the DA into council.

In the meantime we arrange development funding from the bank subject to the DA being approved by council. The bank will want to see a copy of the plans submitted to council, a cost summary and a time schedule at this stage. Typically the bank will give us an 80% lend on the land, and an 80% lend on construction and other costs. We usually use Ashe Morgan Winthrop to negotiate the finance for us. We get an idea from our architect about when council will issue the DA so we start arranging finance about 3 months prior to expected settlment.

The bank will send out a valuer to value the land in preparation for an imminent settlement. This is good, because they're valuing the property without the DA at this stage.

Also in the meantime we prepare all our marketing material and have our solicitors start preparing the contracts.

Once DA is approved we settle on the land 3 weeks later and start marketing...but before we start marketing we have to get a preliminary strata plan done to include in the contract.

The bank doesn't usually ask us for OTP sales so it doesn't matter if we sell or don't sell any of the properties during the marketing stage. Occassionally though, the bank will ask for presales before they release any construction funding to us. This depends on the experience of the developer, the area that they are developing in and the general market of the area. You will generally get a higher price if you wait till the unit is completed before selling. Also, the construction finance is usually set up with an ending date which can be extended with out problem. Your construction facility will not be due just because the project has been completed, they usually allow a few extra months for you to sell your product.

Once we're ready to start construction we finalise our construction finance part of the deal. The bank will get a QS to price the job and they'll send another valuer out to value the land, and do a valuation on the end product. This is good because the DA has increased the value of the land, which means we have more equity in the deal, so we put less cash into it.

Also, the bank will take a charge over the company and obviously take first mortgage over the development. As this is development funding, you won't be required to prove servicablilty (if your intention is to build to sell)...but you will need to provide balance sheets, assets $ liabilities statement and a bank statement showing that you have enough cash to cover your 20% of the deal.

That's basically it...I hope this helps

Just to answer a question about selling something without owning it....i'll quickly outline what we're doing at the moment to give you an idea how it's done....

Back in March (I think) we agreed to purchase a development site for 23 units which already has Council approval. Due to other commitments we asked the vendor for an extended settlement till October. He agreed. We exchanged contracts.

The day after contracts were exchanged we started marketing. We have now sold and exchanged contracts on 90% of the development, and we still don't own it.


Also, Beech is correct....i doubt you'll get your DA within 5 to 7 weeks! Try thinking along the lines of 4 to 6 months for a duplex, and up to 12 months for bigger projects. Yes, you can lodge plans to council even if you're not the owner, but the vendor has to give you written permission and you have to lodge that permission with your DA.

 

[always_learning]

Wow!
Forget a Henry Kaye, I want to attend a JoannaK seminar!

 

[Nominees]

Always-Learning you beat me to it!

WOW thanks (Beech and JoannahK) for the info.

A few things, getting plans through council takes longer than I thought. (I have done a few single dwelings and they come out within 5 weeks easy.) Thank you for the warning...

The bank doesn't usually ask us for OTP sales so it doesn't matter if we sell or don't sell any of the properties during the marketing stage.

As this is development funding, you won't be required to prove servicablilty

This was exactly what I was after! Thank you very much, but what is it that I must prove?

So as I understand it, if I have 20% to put into the deal the banks will be happy to assist?

When you say:

We usually use Ashe Morgan Winthrop to negotiate the finance for us

Do they lend you the money or are they "commercial mortgage brokers"?

Also how difficult was it for you to do the FIRST "BIG" deal?
(I guess that after you have completed a few successful projects they lend you the money easily.)


How do you actually approach the lenders? Do you do a feasability plan etc...

What is it they want to see?

I realise that once you have a working relationship with the lenders you only have to call them and say "I need 3M" and they say "When do you want it ? Which account to you want us to put it in"

But what did you have to do ( or go through) when you FIRST started doing these deals?

Very much appreciated!

Nom

 

[beech]

Nominee i told you Joanna could tell you more.

Wonderful post Joanna for us learning property developers.

Was going to ask Joanna some more questions but Nominee has got plenty so we shall let Joanna get through that lot first.hopefully


beech

 

[JoannaK]

Hi,

Warning: LONG post

You'll have to prove that you have the equity to put into the deal. You will be asked for bank statements, Assets and Liabilities and a Balance Sheet.

If you have enough equity, the bank will be happy to do a deal on the basis that the anticipated resales figures are realistic. They will confirm this with their own valuations. The banks want to see (generally speaking) a 25% profit margin...and if your resales don't give you that they will do one of two things:

1) they won't do the deal
2) they'll ask you to tip in more equity

Ashe Morgan Winthrop are finance brokers. They do all sorts of finance but are very active in development funding and mezzanine funding. They do also lend out money themselves and joint venture with developers.

Our first deal was not difficult to do at all, but it was not really a big one. It was 6 units. We bought our site well (below what other developers were paying for sites around the area at the time). We sold very well (compared to the original anticipated resale projections) and we've kept construction within budget and relatively on time. But this was a fantastic stepping stone for us to move on to bigger deals.

The next one was 12 residential and 1 commercial unit in an area that hadn't been developed in over 15 years...and finance for this one was a big problem for us (as there were no comparable sales to establish market prices) and we had to jump over a lot of hurdles to get this over the line. Having said that though, we've proved everyone who said we wouldn't sell them for what we anticipated WRONG, but that is a whole other (very long) story which I'd be happy to outline some other time!

But, the first BIG BIG one (big to us is anything over 25 units) we are in the process of doing now. We bought it in February just passed and are due to settle on it in February next year (subject to council approval of course)...and I'll just say that it is difficult! Just getting the preliminary plans together has taken 6 months. Finance on this will be tricky and complicated, and I'm definately having a broker do it for me, although I arranged the first stage of the finance myself! Again, it is in a market that has not got firmly established resale prices for what we're doing (there are good resales, but our end product is completely different to the standard unit so presales will be required) so again there will be lots of hurdles to jump.

Yes, banks will lend money more readily once you have a few completed projects under your belt....BUT...they lend project by project. If your next project doesn't stack up it doesn't stack up....they're not here to do anyone any favours...you'll be asked to tip in more cash to get the deal done. Your reputation helps, but it's secondary to the deal.

To approach the bank you will need a feasibility report on the project...and it's a good idea to give them as much information as possible. Get your own QS to price the construction....get real estate data to back up your resale projects, have a good set of plans to give them so they can see what you're on about, get a montage done so they can see what the finished product will look like. On our first deal I also gave them profiles of the directors of the company, our past working history and an outline of our structure so they learnt about us, and knew how we operated. It also helped us with our relationship building with our account managers. The banks that do alot of development funding want to grow with the developer, so the relationship you develop with them is very important. They'll always ask for more information, especially if they don't know you. I don't know about other banks, but our primary lender will only lend funds to people who want to develop as a business, they don't want to lend to someone who just wants to do one duplex and that's it (they have their own development finding department that just does this stuff). I just ring my banker, explain briefly what the deal is, then email him my feasibility. He'll get back to me with his finance deal, and we move on from there.

No matter how big we get or how big our projects get, we will NOT be able to just ring our banker and say "I need $3M, can you have it to me by next week"...they still need to go through their processes...and each and every deal needs to be approved by their credit department...no matter how big the deal is. The only difference is the bigger the deal the higher up in the credit department food chain it goes in order to get approved. But they will hurry it along for you.

I hope I've answered all your questions....I hope this helps a bit.

 

[Nominees]

JoannaK,

I hope I've answered all your questions....I hope this helps a bit.

Understatement! This is helping me a lot!

It is all starting to make sense, I will think about this a bit more and post somemore questions if I have any.

Once again, "Thank you"

Nom

P.S: Beech how about you ask your questions now

 

[ozdog]

Hiya all, I have been lurking on this forum for a few years now, but this is pretty well my first post

I have recently begun my 1st development. It is as follows

I have purchased a large block, placed on a 4 mth contract and granted the vendor they're asking price in return for the long contract. Before buying the land, got hold of a very good builder and architect and took them to the site. They told me what I could put on there, and what the council might approve. Then went to a very reputable town planner. Showed them the site, and they told me what the council would accept, then went to the council and asked them what I could put on there. I am putting a duplex and courtyard block on the land.

I have the plans drawn up with artists impressions of the site, approach nearby residents to get their nod to go through council. Goes through council (hopefully gets rubber stamped) and it's up and running.

I am dealing with a very very good mortgage broker.

About 1 year ago, I had no idea where to start, and saw an add on TV about a guy called John Fitzgerald and his property investing kit. It cost me $250. Now the info in that is invaluable. It is a veritable "HOW TO" on development and getting started in property investing. I have basically been following his advice in it, and everything is going to plan.

He also has a company called investloan (investloan.com.au) which specializes in investment finance. The manager in brisbane is awesome, and is bending over backwards to help me. It appears, that with all the numbers, I will be able to keep this development (woohoo) and use the equity to keep going.

I just took everyones advice on the forum, and lot from John's kit, and just got out there and asked questions.

 

[beech]

hi Joannak,

a couple of questions,

1. if your 12 month option expires will it be easy to extend an extra couple of months if DA is nearly through?

2. i know your husband is a reg builder.so when you do your feasibility say you want 25 % margin as in the case of the PD do you guys add your margin say 15% to that(for building) and look for a 40% margin?

3.do you think there would be enough profit margin left in development (at the moment)if your husband wasnt a builder?


just wondering on that last one because of the excessive cost rises at the moment.
, ( land, construction etc)


thanks again

 

[JoannaK]

Originally posted by beech

1. if your 12 month option expires will it be easy to extend an extra couple of months if DA is nearly through?

Easy to extend. We generally negotiate this at the time of purchase, and make sure that the vendor clearly understands that we can not accurately predict or control how long the DA will take to be approved, we simply give them a guide as to how long we think it will take. We also agree to provide the vendor with regular written reports on the progress of the Approval so they are kept up to date and not shocked when/if we request an extension.

2. i know your husband is a reg builder.so when you do your feasibility say you want 25 % margin as in the case of the PD do you guys add your margin say 15% to that(for building) and look for a 40% margin?

When we do our feasibility, we must price the project inclusive of builder's margins. The lender's QS insists that we include builders margins in our costs because they need to price as if we were to go bankrupt and employ another builder to finish the project. If we didn't do this, we'd have a battle on our hands getting the QS to sign off on the development and give the banks the go ahead to fund us. It just wouldn't happen. So, if we went bust mid way through, the bank would take possession and be able to confidently employ another builder to complete the project at the cost the QS says it's going to cost.

As an aside, my husband's building company does actually get paid these margins, so it is a legitimate cost of the construction, and it does not increase our profit margin on the development. Like any other building company, his company will submit a tender to us, generally as a lump sum, and any cost overruns is the building company's problem, not ours as the developer. Equally, any cost savings that they can manage, they keep.

Our profit margin on the development is on the development's total cost; land, construction, fees and all the other stuff in between.

3.do you think there would be enough profit margin left in development (at the moment)if your husband wasnt a builder?

Well, we price each development at the actual market rate, so I would say yes...but then we'd have other issues to deal with instead such as the quality of the workmanship, time delays, budget overruns, and endless battles over variations...all of which can cost big time, and we avoid right now.

just wondering on that last one because of the excessive cost rises at the moment. ( land, construction etc)

We don't tend to worry about construction cost rises too much whilst in the middle of construction. We're very big on building good solid relationships with our major suppliers and subcontractors. They know our track record, and what we've got coming up over the next few years, and they know that we're not going to screw them. So, because of our buying power and we're not difficult people to deal with, we are able to get fixed prices on our requirements, so we can confidently price and build our jobs knowing that we're not affected by price rises half way through. Naturally prices do rise, so we make sure we have each project priced properly before we start.

Hope this helps.

 

[beech]

thanks Joanna,very helpfull.

a couple more questions:
in general are there plenty of development sites available going forward for you guys?

and what would be (aside from the builders margin) the lowest profit margin you would accept on a future development?

thanks