Commercial Development Loans

Finance for property development usually operates as an interest only, draw-down facility to finance development as necessary. Often the interest on a development loan is capitalized during the development phase, with the complete loan comprehensive of interest charged being repaid upon the trade of the development and or the refinance of any residual debt.
Borrowing capacity and highest LVR for property development loans
The borrowing capacity you can get for development finance will differ depending on the development lending criteria you are required to meet. This will be different from lender to lender and also defendant on the tender.
Normally, Land Development Cost financing will provide up to 80% of the hard costs of your development, whilst GVR financing will provide up to 65 to 7o% (ex GST and agent selling costs). For a full overview of your borrowing capacity, consult a commercial lending specialist.
Finance options for property development
Land Development Cost (LDC)
Land Development Cost finance provides property developers with the funds to undertake the acquisition and construction of the development. It also includes soft costs such as architecture, engineering and interest costs.
This is the most common form of development finance and is generally limited to between 70%-80% of the overall Land Development Costs of the development project. You may be required to achieve a pre-determined level of pre-sales before finance approval will be granted generally 50% of peak debt or more.
Mezzanine finance
Usually only available to experienced property developers, mezzanine finance involves the use of money from external investors rather than deposit capital from the developer or equity partners. This funding supplements senior debt (LDC and GRV funding). It traditionally involves both specialist lenders and private investors. The interest rate on a mezzanine finance facility is normally higher than other property development finance methods, and is based on a number of factors including risk and total pre sales.
Lender criteria for development finance
Lenders will look at a number of areas when considering if they will provide finance for a development project. These may include:
• Project management team experience
• How much equity you bring to the project
• The location of your proposed development
• Type of Development (Residential v Commercial)
• Level of pre-sales/pre-leases
• Ability to cover cost over runs
• Exit strategy
• Your experience as a property developer
• Financial strength of the property developer
• The profit potential of the development
• Builder experience and capacity
Experience
Experience can play an important role in securing finance, but if you are new to property development that doesn’t mean you won’t be able to secure funding. However, new developers may have to provide additional capital, and may not be able to borrow as much money. Depending on the lender, new developers may also need to appoint an approved and experienced project manager in order to secure suitable finance.
Equity
The more equity (deposit/capital) you can provide at the outset of a development project, the more favorably a lender is likely to view your application for development finance. A greater equity stake will reduce the risk of financing the project for the lender, as well as your overall development costs.
Profit potential
Part of securing finance is being able to determine the profit potential of your development project. Part of the funding process will involve a feasibility study conducted by the lender’s valuer to determine the profit margin. This step is critical in determining profitability and its acceptance to the lender.
Development purpose
In some cases, very specialized developments, such as for a childcare centre or motel, may attract additional conditions from the lender before finance is approved, simply because these types of developments are very specific. A more general development, such as an apartment block, may be easier to find development finance for.
The costs of property development
Depending on the scope of your project, the costs of property development and construction may include:
• Contingency allowance
• Stamp duty
• Professional/legal Land/building acquisition costs
• Construction or refurbishment costs
• Interest
• Selling & Marketing Expenses
• fees
• Architect, Engineering, Quantity Surveyor, (Specialist Consultants as required)
• Finance Costs.