How Does Property Development Finance Work?
Property development finance comprises many different financing options and is often poorly understood. It is crucial to understand how to finance a development project, whether it is to cover the initial costs associated with land acquisition, construction costs, or financing of completed stock.
The following provides a look at the different property development finance options and the process involved to get there.
How Does Development Finance Work?
Development finance plays a pivotal role in real estate projects by providing the necessary funds to initiate, progress, and complete development ventures. It serves as the financial backbone, supporting developers in acquiring land, covering construction costs, and managing expenses throughout the project lifecycle.
Development finance allows a developer to leverage a limited quantum of capital (or equity) to ensure an entire development cost budget is fully funded through to completion, and beyond.
Whether for multi-unit residential developments, residential subdivisions, commercial properties, or mixed-use developments, property development finance bridges the gap between your equity and the total development cost.
Exploring Your Property Development Finance Options
Understanding the essential elements of property development finance is crucial for developers seeking funding for their projects. Here are the key components:
Acquisition Finance: Financing to purchase land for development purposes. This component covers the initial cost of acquiring land. The financing for land acquisition can be complex, as it often involves significant amounts of capital and varying degrees of risk depending on the location, topography and intended use of the land.
Construction Finance: Financing to cover all costs associated with a development. These costs include construction/civil costs, consultants fees, subdivision costs, council fees and any other project related costs.
Residual Stock or Bridging Finance: Financing of completed stock, usually for the purpose of providing additional time to sell down or lease completed product. These facilities are used to refinance construction facilities on completion and are provided on a short term basis. Residual stock financing is usually more cost effective and provides early access to profit prior to sell down.
Securing Financing for Your Development Project: Step-by-Step Guide
Navigating the process of securing property development finance for your project can be complex. It is important to have a trusted financial advisor that can support you throughout the financing process.
The below is a step-by-step guide to securing a property finance facility:
Assessing your financial needs: Determining the amount of financing required for your project involves anticipating total cost to complete the development in relation to the level of equity available to contribute. Lenders typically assess the required loan amount relative to the total cost of the development. This is measured by applying a loan to development cost ratio or “LDCR”, with the remaining costs being funded by developer equity. The LDCR varies widely between lenders and is a key metric in a lenders assessment of credit risk. Given the capital-intensive nature of development borrowers generally seek to maximise the LDCR, to preserve capital.
Selecting the right lender for your needs: With the myriad of lenders across the market from banks to non-banks, private capital, institutional funds, and many more, it is important to understand the varying lending criteria, financing costs, and risk tolerances of each lender. Financing costs generally have a corresponding relationship with a lenders credit risk tolerances. Balancing these variables according to your specific needs will ensure you engage with the right lender for you.
Preparing documentation and loan applications: There is a considerable amount of documentation required in the loan application process. These may include, stamped consents and architectural plans, valuation reporting on current and completed values of the development, quantity surveyor preliminary reporting, statements of position, financial statements of borrowers and sponsors, developer and building contractor resumes evidencing experience, to name a few. The loan application process requires the analysis of all information into a comprehensive, yet concise report. Any project related risks need to be identified and mitigated to satisfy the lender.
Reviewing loan offers and negotiating terms: When evaluating loan offers received from lenders, many factors must be considered including the conditions precedent to accessing the loan, financing costs, loan terms, repayment options, and more. Lenders are often open to negotiating certain terms, whereas other terms may be a lenders “bottom line”. Understanding what can be negotiated with a lender is critical to ensuring the best possible loan terms for your project.
Finalising the loan agreement and settling the loan: Once terms are agreed upon the loan agreement is finalised with the lender. It is essential to understand all details of the facility agreement including the process of satisfying any conditions precedent to settling the loan. Navigating a smooth and timely process with your lender through to settlement will help ensure a successful development project.
Factors Considered by Lenders in Property Development Finance
Lenders assess various factors to determine eligibility, risk, pricing, and overall lender appetite, these include:
Financial capacity and previous track record of the developer, appropriateness of the project team and consultants, salability of the product.
Additionally, lenders evaluate the project's feasibility, assessing the total development cost against the expected project return. A profitable project is in everyone’s best interest as it ensures all parties remain engaged for the duration.
Each lender will require a specific level of borrower equity within the project, often required to be expended prior to the commencement of the lender’s facility. Levels of equity vary greatly between lenders, and it is critical to evaluate what level works best for you.
Lenders require a clear identification and demonstration of the project specific risks and mitigating strategies.
Fortis Capital can assist you in your Property Development Finance journey
While securing property development finance may initially seem overwhelming, the process is simple with the right choices and expert guidance.
When you find the financing that’s right for you, you gain the freedom to make your vision a reality by bringing your project aspirations to life with confidence and flexibility.
The team at Fortis Capital are experts in providing and arranging funding across each phase of the development lifecycle.
Please reach out to us for your financing needs and tailored advice.
