It is well known that to secure development finance from a major bank is getting much more difficult, and changes to stamp duty concessions, like those in Victoria, aren’t helping. Like the GFC days when it was virtually impossible to obtain finance, tighter controls continue to be implemented. Banks generally require 100% of debt coverage from pre-sales and they have pulled back on the percentage of hard costs that they will fund.
However, there are non-bank lenders and private lenders that will look at a project from a different angle to the major banks. Developer finance lenders will work off the gross realisation value (GRV) of the project rather than the traditional hard cost or total development cost (TDC) method when working out how much they will lend.
The main things non-traditional development finance lenders will look at are:
- The project – does it make sense?
- The profit – is there a big enough profit in the project?
- The people – are the people behind the development experienced?
GRV development finance method explained
Gross realisation value (GRV) based first mortgage facilities look at the projected end value of the project and will extend funding to a percentage of that. In general, the maximum GRV is 65%, or 70% in some cases.
Advantages of GRV development finance
- No pre-sale requirements can mean a higher realisation price especially in a rising market.
- No pre-sale requirements can mean the project holding costs are less and the development can commence more quickly.
- Less developer equity required.
- Taxable income figures for the borrowers are not generally required.
- All fees and interest can be capitalised
GRV development finance general guidelines
With non-bank lenders and private funders, each project is looked at on an individual basis. However, below are some guidelines that, if met, will help you secure developer finance.
- Projects should be in desirable locations with high demand for the product being built.
- Profit margins should be between 15% and 25% depending on the type of project.
- The borrower should be an experienced developer.
- The borrower, while not generally required to prove serviceability, will need to have some tangible assets behind them and not be credit impaired.
- While the funding may typically be available up to 65% of the GRV or end value, this ratio cannot be exceeded at the land stage or any stage of the development. If the land has increased significantly from when it was purchased there is no restriction on using the increased value. This means that 100% of hard costs can be funded in some circumstances.