In this guest post, PMA referrer, Dan Holden, Director of HoldenCAPITAL, writes about the benefits of using private capital to settle a development site.
Banks are very reluctant to get involved in lending against development sites. Some developers were getting sites funded as house investment loans because there was an existing house on the land they were purchasing. This was all too common until 2015, when the valuation industry was ordered to make a note wherever they thought the purchase was actually intended for a development project rather than a passive rental return house. The heads up from the valuer to the bank resulted in loans being declined if the bank believed it was for a development project.
Some of the reasons the banks are so reluctant to lend against a development site include:
- An inability to prove the borrower can service the monthly interest, usually requiring 1.5 times interest cover from recurring income.
- The main exit strategy is via a construction loan, which the banks are now only doing on a selective basis.
Banks take a view that they will only lend up to 75% of total development cost for the construction loan, and the land in a development project should typically takes up less than 20% of the total development cost. If they were to advance monies against the land, then they are reliant upon the developer putting in further cash to actually convert it into a construction facility. Being reliant upon a developer to find more money down the track is not a palatable credit answer. To put that in numbers, if you had a $10 million TDC project and the land was $1.8 million, the bank is only going to lend you $7.5 million to build the project. So if you don’t have $2.5 million now, they won’t rely on you finding it under your pillow in six months’ time.
We have seen a rise in developers using private capital to get these loans completed quickly and without the fuss of proving serviceability or an exit strategy. The cost of capital is higher at 15%p.a. however, at a lower LVR and/or with a robust sponsor we have been able to secure 12%p.a. While 15%p.a. sounds high, it is typically just for 4-6 months while the developer finalises his BA and any marketing, so the overall burden to the project is fairly insignificant. It is also better than using cash for that period and if you’re an elite property developer, you would want to see your cash invested at better than 15%p.a.
Dan Holden – Director, Holden Capital
HoldenCAPITAL is a specialist construction finance group, recognised as a market leader through its successes in deal structuring and the sourcing of debt and equity solutions.
Dan has over 13 years of development and finance experience which includes over six years in finance consultancy and funds management. You can contact Dan at [email protected].