Forum Replies Created
Hi Alfresco
A bit of time has passed since you posted your questions but I thought I would answer nonetheless.
Some key concepts of ‘commercial’ development funding:
– Presales – banks will typically require a level of presales prior to funding construction. As a general rule net sale proceeds (sale prices less GST and selling costs) will need to cover say 50% of the debt limit. There are funding options without presales but in your question about the difference in this type of funding, this is a key consideration.
-Leverage – commercial construction funding works of two lending ratios, that of Gross Realisation (exclusive of GST) (GR) and of Total Development Costs (TDC). Again, each lender has different policy on this but typically lending is capped at the lower of 80% of TDC (this includes land value, construction costs, contingency, professional fees and interest provision) and 65% of GR.
– Loan term – 12 months compared to 30 year residential loan term. These facilities are set up to get the project built with repayment upon completion via sale of the completed stock or refinance to a longer term investment facility.
– Interest Rates – the way this is structured is usually driven by the loan size. For smaller development loans this can be a straight interest rate, say 6% to 7%. For larger loans this will be split between interest rate (charged on drawn balance) of say 4.5% and a line fee (charged on the loan limit) of say 2%.
– Interest – interest during construction is capitalised (added to loan balance) during construction rather than met monthly
– Other costs – valuation reports are more expensive, think $5,000 rather than $500 and you will likely also require a quantity surveyor to certify progress claims say $3,000 for upfront report and $1,000 per claim.
The above is just a very broad picture and each of these points can be dissected further. Let me know if the above raises any further questions.
Cheers
RhysRhys Adams
http://www.redcommercial.com.au/
Email Me | Phone MeCommercial Property and Construction Finance Specialist
Hi QM
A typical loan for commercial property will be short term, say three years. This is driven by lender’s cost of funds with longer term capital being more expensive. As an example, we obtained quotes recently for a client for a 3 or 5 year facilty which were priced with a 0.47% spread between them.
Loan term can also be tied to the lease expiry profile but given your comment about lease term shouldn’t be an issue.
There are lenders that have “off the shelf” style loans with 15 to 25 year terms but I find we can obtain better pricing and loan terms on shorter term commercial bill facilities.
Interest Only is obviously better from a cash flow perspective but given the 8%+ yield on commercial property compared to circa 5% interest rates you’ll find your investment to be positively geared even on a Principal & Interest basis.
I could go on and on but let me know if there are any more specific questions that I can answer for you.
Cheers
RhysRhys Adams
http://www.redcommercial.com.au/
Email Me | Phone MeCommercial Property and Construction Finance Specialist
Hi Shane
A private lender would be the place for what you are looking for (except for interest rate).
This sounds to be a pretty straight forward transaction where you could achieve the following loan terms:
– Interest rate – 10%
– LVR – the lower of 80% of Total Development Cost or 70% of Gross Realisation (excl. GST)The higher cost of this style of funding has to be weighed up against the marketing costs of preselling, the potential “discount” required in selling off the plan and if you have a positive view on the market, locking in sales at today’s prices.
Personally I see a lot of borrowers initially baulk at the cost of this style of funding (especially when new to development and used to <5% home loan rates) but after reviewing their project feasibilities do see the sense in it.
I agree with your strategy of maximising borrowings to keep control of funds as a contingency. I am currently funding a project where there was an unexpected cost of $120k following soil tests. In this case the developer didn’t have ready access to cash so has been a bit of juggle and some uncomfortable phone calls since.
Good luck with it, I hope to see you keep us updated on your progress.
Feel free to post any further questions.
Cheers
RhysRhys Adams
http://www.redcommercial.com.au/
Email Me | Phone MeCommercial Property and Construction Finance Specialist
Hi Terry
My comments re granting of mortgages were based on the exercise of the option and subsequent settlement and transfer of title.
Cheers
RhysRhys Adams
http://www.redcommercial.com.au/
Email Me | Phone MeCommercial Property and Construction Finance Specialist
Hi Cheryl
There are a number of unknowns here so will try answer some questions in general terms:
Will the sale to the builder be considered presales for traditional funding? Generally no, the list of conditions for a sale to “qualify” for “traditional” funding is usually a couple of pages long. To quote directly from a Terms Sheet of one of the major banks – “No purchaser to acquire more than two units without our prior written consent”. This was obviously for a unit development but you get the idea – qualifying presales are typically limited to 2 per buyer to minimise settlement risk.
To structure with vendor finance the seller the seller will need a decent equity position in the property. Your debt funder will require 1st mortgage security over the property meaning the vendor will need to have sufficient equity to enable the repayment of their mortgagee with the funds you are able to raise. Without seeing a feasibility or knowing if and how the subdivision is planned to be staged it is hard to say what fudning will be availble from the 1st mortgagee but typically it won’t be much.
The vendor can then secure their position by a second mortgage which I can go on and on about the next round of challenges there. We have funded a few subdivisions in this structure but through “private” funders, not cheap but do take a commercial view on these funding arrangements.
Let me know if you have any more questions.
Cheers
RhysRhys Adams
http://www.redcommercial.com.au/
Email Me | Phone MeCommercial Property and Construction Finance Specialist
As suggested by Terry, we have seen a lot of self employed business people using their SMSF as an investment vehicle to buy premises from which to operate their business.
The ability to do so is obviously dependent on the availability of capital yor boss holds within super but given the relatively low price he is looking to pay there may be capacity for this investment while maintaining sufficient diversification.
This strategy is definitely one that requires proper advice and structuring upfront!
Rhys Adams
http://www.redcommercial.com.au/
Email Me | Phone MeCommercial Property and Construction Finance Specialist
Hi Steve
Your project will be easily funded with or without presales.
Presales reduce the risk to the developer, not just the lender but I would go down the no presale path unless you have a negative view on the market as you’ll be able to achieve better sale prices marketing the completed product. At the proposed leverage you are proposing, the risk mitigated by presales is quite low.
Without knowing your financial position, assumed rent on the completed townhouses will sufficiently prove servicibility on the debt limit.
As far as where to go to get this funded…a finance broker would be a good first step. They will be able to provide advice on structuring, feasibility as well as funding options.
Cheers
RhysRhys Adams
http://www.redcommercial.com.au/
Email Me | Phone MeCommercial Property and Construction Finance Specialist
Hi Keiko
If you’re looking for passive investment I’d be looking for a property with a long term lease to strong tenant. There is more profit on offer with the vacant/near expiry strategy but commercial property is not like resi where vacancies are easily filled and this strategy might be best left to more experienced investors in this asset type.
And assuming you’ll be looking for debt funding, a short lease expiry profile will be something that you’ll need to mitigate somehow or face higher debt pricing.
In looking at investment risk in commercial property you need to consider the following aspects and determine what level of risk/return they are looking for:
•The property’s tenancy profile;
•The strength of lease covenants;
•The lease expiry profile;
•The property’s location and future supply and demand; and
•The condition of the property and likelihood for future capital expenditure.All the best, I am a firm believer in the fundamentals of investment in commercial property when done properly – yielding >8%, a good commercial property will be spinning off decent cash with borrowings available <5%.
Where are you looking at buying?
Cheers
RhysRhys Adams
http://www.redcommercial.com.au/
Email Me | Phone MeCommercial Property and Construction Finance Specialist
Hi BNS
Just another investment strategy for consideration given your objective of retirement in 15ish years would be commercial property.
$1m of equity combined with debt should provide capacity to invest in commercial/industrial property with a decent tennancy profile. Yielding +8%, lock in borrowings <5.50% and you have a positively geared property that will pay itself off by your targeted retirement age (plus provide extra cash flow along the way).
If I was to go down this path I would be looking for a property with a long lease to a single, strong tenant.
Cheers
RhysRhys Adams
http://www.redcommercial.com.au/
Email Me | Phone MeCommercial Property and Construction Finance Specialist
Hi QM
Is the property for investment or occupation?
If its for investment the lease covenants would be the most critical aspect? ie strength of tenant, what security is in place, remaining lease term before expiry, who pays outgoings? And almost forgot, how much rent are the obliged to pay?
The above aspects, inparticulary rent and lease term will also be important for debt funding. Commercial property lending isn’t like residential property in that a lender will like/need to see sufficient remaining lease term beyond the loan term.
Cheers
RhysRhys Adams
http://www.redcommercial.com.au/
Email Me | Phone MeCommercial Property and Construction Finance Specialist
Hi Amelie
As long as the business and your partner can show sufficient income to show debt servicing and you have 30% equity to contribute to the purchase (plus costs) you should been in a position to finance the property.
Cheers
RhysRhys Adams
http://www.redcommercial.com.au/
Email Me | Phone MeCommercial Property and Construction Finance Specialist
Hi Tranquilles
To be able to give a ball park valuation can you provide a few more details?:
1) I assume the 800m2 refers to the land size rather than lettable area, if so, what is the lettable area?
2) How long until lease expiry?
3) Does the property have an industrial or commercial use?Understanding the above I’ll be able to refer to some other recent valuation reports to give you some benchmarks to use to get a better feel for the property’s value.
Cheers
RhysRhys Adams
http://www.redcommercial.com.au/
Email Me | Phone MeCommercial Property and Construction Finance Specialist
Hi Amelie
Your solicitor would be able to provide the best advice but perhaps a trust structure where you are a beneficiary may work and provide you with some protection?
In what structure do you operate your business together?
You also need to be mindful of stamp duty ramifications for you to add your name on title down the track.
Where are you looking to buy?
Cheers
RhysRhys Adams
http://www.redcommercial.com.au/
Email Me | Phone MeCommercial Property and Construction Finance Specialist
Hi Benny
There are a couple of ways that you can look at construction funding, either traditional bank funding or through “Private” lenders.
To answer your first question, when looking at construction funding a lender will consider two ratios:
1) % of Total Development Cost (TDC)
2) % of Gross Realisation (GR) (which as Richard pointed out would be exclusive of GST)Each bank has a different policy on these ranging from 70% to 80% of TDC or 60% to 70% of GR. They will lend to the lower of the two.
Private lenders on the other hand can stretch leverage to 85% of TDC if project is well located and stock is well priced.
To answer your 2nd question, I read as though your intention is to construct and retain the 10 units for longer term investment? Typically it is not easy to refinance completed stock with ‘home loan’ type products. Given the lower yield on residential property you would likely need to be able to show a significant level of external income to show sufficient servicing for a loan of this type.
The issue of presales was also brought up, again your borrowing strategy will dictate what is required in this regard. For bank funding you would likely need to be able to show at least 50% cover of your debt limit with net proceeds from presales. Private lenders on the other hand will look at wearing the market risk and fund a project without presales should the stock been seen as readily marketable.
Presales help reduce the risk to the developer as well as the lender however the advantage of funding without presales is that it allows the developer to commence the project sooner and save on holding costs, reduce upfront marketing costs and potentially achieve a higher price for their product given buyers are able to “touch and feel” rather than buy off the plan.
Obviously private lending is a more expensive form of finance than that available from banks but can work for the right project.
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Cheers
RhysRhys Adams
http://www.redcommercial.com.au/
Email Me | Phone MeCommercial Property and Construction Finance Specialist
