Understanding each phase of the property development lifecycle
Embarking on a journey into property development is an exciting endeavor, but it requires careful consideration and strategic financial planning.
Understanding the distinct phases of the property development lifecycle and the types of financing required at each stage is critical for a projects success. In this blog, we'll discuss the different phases of property development and explore the various financing options we can provide to support these stages.
1. Acquisition Phase: Securing the Foundation
The journey begins with the acquisition phase, where developers identify and purchase land or existing properties for redevelopment. Financing options during this phase typically include equity financing, where investors contribute funds in exchange for ownership, and debt financing, such as loans from financial institutions to cover a portion of the purchase price. Ensuring the project is well capitalised from acquisition is critical for the project’s success.
Land is typically low yielding, therefore developers should carefully consider the loan repayment terms of any land acquisition facility (capitalised vs paid interest) and understand how this impacts your cashflow. Often developers experience delays when achieving the necessary consents therefore a loan term with a healthy buffer should be sought to minimise the added cost of rollover fees or refinancing costs.
A Breakdown of Our Land Acquisition finance options. https://www.fortiscapital.co.nz/land-acquisition.
2. Pre-Development Phase: Laying the Groundwork
Once the property is acquired (or before if favourable terms are secured), developers move into the pre-development phase, where they confirm all necessary consents, refine the project feasibility, assemble the delivery team and get ready to mobilise on site.
Financing during this phase, covers expenses related to pre-construction activities commonly referred to as “soft costs”. Its important that the developer has adequate funds to move through this phase at pace to minimise the holding cost associated with any land acquisition facility. Typically pre development costs are funded via equity and contribute to the equity component of the construction facility. There are however some funding options available to fund these costs on a short term basis prior to construction commencing.
3. Development Phase: Bringing the Vision to Life
With the team assembled, developers transition into the development phase. Construction loans play a pivotal role in financing the actual construction activities during the Development Phase. These loans provide developers with the necessary capital to cover the total cost to complete the development, including a healthy contingency provision for unknown costs.
Mezzanine financing provides developers with additional capital beyond what traditional lenders are willing to provide. It sits between equity and first mortgage debt, offering a higher level of risk in exchange for the developer committing less equity (and sometimes no equity) in the project. Developers must carefully weigh the cost of capital against the potential benefits to ensure the project remains financially viable.
It’s important developers source finance offers with terms that can be easily satisfied. Moving quickly through each phase reduces finance costs and the developer’s exposure to market movements. An example of this is often Main Bank funders require a high level of presales to be achieved before advancing funds. In this market this may take considerable time to achieve which increases holdings costs and ultimately the time it takes you to complete the project, realise your margin and move to the next opportunity.
Savvy developers see the value in Non-Bank offers without the need for presales allowing them to move quickly through the Development Phase.
A breakdown of our Development finance options. https://www.fortiscapital.co.nz/residential-development-finance
A breakdown of our Land Development finance options. https://www.fortiscapital.co.nz/land-development-finance
4. Sell down Phase: Turning Vision into Reality
The sell-down phase occurs upon issuance of CCC and title. During this phase, any presales are completed, and developers focus on the final marketing and sales push to sell down the remaining units in the development.
The sell-down phase is critical as it marks the culmination of the development process and when the developer, lenders and any investors realise their return on investment.
In a market where sales are slower a developer may need more time to execute this phase. Residual stock funding is a form of bridging finance, which provides developers with short-term capital to bridge the gap between the completion of construction and the sale of remaining units. Bridging finance helps developers manage cash flow and holdings costs associated with the sell down phase.
A breakdown of our Bridging finance options. https://www.fortiscapital.co.nz/bridging-finance
Navigating the property development lifecycle requires a keen understanding of the financing needs at each stage. From acquisition to sell down, developers must carefully evaluate financing options and structure deals that align with the project's goals and risk profile. By leveraging the right mix of equity, debt, and other financing tools, developers can successfully bring their visions to life and unlock the full potential of their properties.
The team at Fortis Capital are experts in providing and arranging funding across each phase of the development lifecycle. Please reach out to see how we can assist you.