Six Units - com loan

[benofbrisbane]

Hi Everyone

I will get my DA any day now for a 6 unit development on the northside of Brisbane. This is my first commercial development, having completed a smaller 4 unit development recently.

In relation to this deal, the numbers stack up to a good return. So now comes the fun part of getting the money!!!

I have been told that banks may do 70% of GRV minus GST at about 2% over mortgage rates. This would be good. However, I understand a bank would be looking at presales and I am not that keen on doing presales.

I have been told a non bank lender might do 60 to 65% of GCR minus GST at 3% to 5% over mortgage rates but would probably not require presales.

Does this sound right?

Also just looking to confirm my understanding is correct, in that the lender would pay out the mortgage over the lot and take first mortgage over the lot? At the moment the loan over the lot is a resi loan on good rates.

It seems to me that if a party only wants to lend 60% of GRV and they get first mortgage over the lot then they are doing pretty well risk wise, in that the value of the lot itself is worth a third of what they are lending. Is that the position? It just seems a bit rough for the old developer. Would a lender take a second mortgage over the land and lend say 40 to 50% of GRV?

In regard to serviceability, using our resi CBA calculator we should be able to service the loan if you count the proposed rents. The lender will count the proposed rents right? Is this the case even if the intention is to sell them? Should we tell the bank that we intend to keep them so that they will count the rent (BTW, I should note that we could fund the interest during the selling period out of savings).

Finally, does anyone have any current experience with presale of 2 bed units for around $375k within a 12 km radius of the CBD? Are they moving?

Thanks for your time.

Cheers


Ben

PS is there any chance of capitalisation of the interest? Or is that a pipedream?

 

[Rolf Latham]

Hi BOB

We are just finishing a 5 unit build which was based on a GRV of 65% in one line

Oodles of serviceability and no presales required.

Yours could be push unless you have some good cash put aside to service the new loan until construction is complete, unless you have a bunch of guaranteed presales and there is a defined exit position

ta
rolf

 

[Aaron_C]

The residential mortgage calculator is not accurate for this type of loan. You need to use the commercial sensitivity rate which is more like 9-10% rather than 7.5%.

In any case, your understanding of lending rates are about right. How much money do you need for construction? How much do you owe? What is the GDV?

You do not need presales if you are a strong client with a strong balance sheet. That means you must have lots of other assets/income. If not, then you will most likely have to do presales.

 

[benofbrisbane]

Thanks for your responses.

We have about $250k in PAYG income and own we own a house and 4 units - which are mortgaged to around 80%. Overall net asset position is around $900k.

GRV is around $2.3 mil and after around $1.6 mil (if possible).

 

[Rolf Latham]

Thanks for your responses.

We have about $250k in PAYG income and own we own a house and 4 units - which are mortgaged to around 80%. Overall net asset position is around $900k.

GRV is around $2.3 mil and after around $1.6 mil (if possible).

Is your GRV based on one line valuation or end value strate value per unit

ta
rolf

 

[benofbrisbane]

strata of each unit and sale price individually.

 

[Peter_Tersteeg]

What lenders are really looking at in pre-sales is the exit strategy. Lenders want to know what happens after completion and you need to show that you can either clear the debt, either by selling or refinancing.

Obviously pre-sales applies to the selling exit strategy. They'll look to the price of individual units and figure out how many sales are required to clear the debt, and that indicates how many pre-sales you need.

Arguments for refinancing to a residential loan can be made, but they are much harder to sell to the lender. You've got to show affordability and a commercial lender is likely to want to justify this on commercial terms (not residential) and they're going to look at it very heavily. It's a very difficult proposal to sell to them.

 

[Rolf Latham]

strata of each unit and sale price individually.

that could be the sticky for you

the one line val is likely 10 to 15% lower

ta
rolf

 

[benofbrisbane]

why would they do that - if that is not what they worth?

 

[Rolf Latham]

why would they do that - if that is not what they worth?

They are worth the end value once they are separately titles.

one month to 6 mths after construction has completed

If you fall over any time before then the mortgagee sale will be based one ONE line sale, because the assets arent available separately yet

ta
rolf

 

[benofbrisbane]

fair enough - but they won't be worth the in one line value either because they won't be complete. They will be a half constructed unit block. Should they just do a val on a half constructed unit block and then divide that by three and then take 20% off for good measure? I love banks.

 

[Rolf Latham]

fair enough - but they won't be worth the in one line value either because they won't be complete. They will be a half constructed unit block. Should they just do a val on a half constructed unit block and then divide that by three and then take 20% off for good measure? I love banks.

true, but thats why they progress pay the work, so their perceived exposure never gets over the approved lvr at any time during the project

ta
rolf

 

[Aaron_C]

PS is there any chance of capitalisation of the interest? Or is that a pipedream?

Yes that's very common for commercial development loans.