Perfect Scenarios for a Private Loan

Perfect Scenarios for a Private LoanAt Private Mortgages Australia, there are a lot of things we do that are different to the traditional bank lenders. Your clients can take advantage of this when they need help with a particular situation.  Let’s look at the scenarios that are perfect for a private loan:

Urgent Funding

This is a common scenario. Your client needs funding urgently and cannot wait the usual 4-6 weeks that a traditional bank loan takes. They need funds within one to two weeks, so need someone who specialises in getting the funds for them with speed. This is a perfect scenario for a private loan.

Read an urgent funding case study here.

Development Funding

For times when your client needs a first mortgage (Senior) or second mortgage (Mezzanine), draw downs,  or completion finance for a development project.  A lot of the banks will not consider completion finance because they do not like lending on incomplete security. This type of private loan particularly assists your clients when something happens towards the end of the project and they need funding to complete it (think budget blow-out).

Read a development funding case study here.

Asset Lending

In this scenario, your client needs to release equity for a business purpose but cannot show serviceability. They want to borrow purely against the value of an asset. A private loan can be made against real estate, where we do not need to look at the client’s income and serviceability.

Read an asset lending case study here. 

ATO Debt Finance

If your client has been denied a payment plan and the ATO has marked their credit file and issued a letter of demand, a short-term facility for 6-12 months at an affordable rate can assist.  Banks will not loan funds to anyone who has an ATO debt. We pay out the ATO debt for them, so they have a clear ATO portal. This allows them to go back to the bank and get a traditional loan.

Read an ATO debt finance case study here. 

Valuation Not Contract Price

Your client has purchased a property under the market value and needs to settle the transaction. They want to borrow against what the property is worth and not what they paid for it. Most banks will only lend the lesser of contract or valuation price. We can lend on the higher valuation rather than the contract price, which may be lower. Sometimes we have lent more than 100% of the purchase price because we can see that it is worth a lot more (think uplift in value due to a development approval).

Read a valuation not contract price case study here. 

Paying Out Business Partners

Say your client is splitting up a business partnership for example, if one of the partners is retiring, they require funding to pay out that business partner as part of an agreement or settlement. We assist by providing a private loan so they can complete this.

Read a paying out business partners case study here.

Urgent Business Opportunity

Your client has a business opportunity which requires some funding to complete. They may have an opportunity to purchase stock at a discount and need funds quickly to secure the opportunity. Once purchased, the stock can be sold to pay back the loan or they can arrange a more traditional loan, which takes longer to organise.

Read an urgent business opportunity case study here.

Credit Repair

Your client is unable to attain traditional finance due to credit issues. Usually something has happened to cause the issue and your client needs time to work through the issues. The process can be lengthy and they may need access to business finance while their credit file is being repaired.  If they have real estate with available equity, then we may still be able to help. We take into consideration how much we are lending against that asset opposed to how much income the client has.

Read a credit repair case study here.

 

Private Mortgages Australia offers cost-effective loans to small-to-medium businesses that cannot get finance from the banks. Our lending process offers greater flexibility and quicker turnarounds than traditional lenders, so that your clients can get the best solution for achieving their goals.

For further information about private loans for business projects, give us a call on 1800 856 683 or contact us via our website: www.privatemortgagesaustralia.com.au/contact-us/

How property development finance works

Every homeowner understands the difference between their mortgage and the equity they have in their home but when it comes to commercial real estate transactions like property development finance, the difference between equity, preferred equity, mezzanine debt and senior debt can confuse even the savviest financial minds.

Let’s take a look at what’s called The Capital Stack to better understand where the different types of finance sit in a commercial property development.

The Capital Stack for property development finance

Senior Debt

Senior Debt is secured by a First Mortgage on the property itself, so if the borrower fails to pay the lender can sell the security property. This greatly reduces risk on the principal invested because, at worst, the lender can recoup its principal by selling the property.

Mezzanine Debt

Mezzanine Debt sits behind the senior debt in order of payment priority. Once the developer pays operating expenses and the senior debt payment all income must go to pay the mezzanine debt. If the developer is unable to pay (assuming they aren’t also in default under the senior debt), the lender typically has the ability to quickly take control of the property. The senior debt and mezzanine lenders will usually enter into an agreement, called a Priority Deed, where they spell out how their rights interact (i.e. what happens if a developer stops paying both of them).

Preferred Equity

Preferred Equity is perhaps the hardest portion of the capital stack to speak about generally because, for better and worse, it’s very flexible. Preferred equity holders have a preferred right to payments over regular (common) equity holders. “Pref” equity positions range from “hard” preferred equity, which function similarly to mezzanine debt and include a fixed coupon and maturity date to “soft” preferred equity, which is more likely to include some of the financial upside if the project performs well. While hard preferred equity holders may have the ability to make some decisions or kick out the developer if they fail to make payments, soft preferred equity holders typically have more limited rights.

Common Equity

Common Equity is the riskiest and most profitable portion of the real estate capital stack. Typically the developer (or sponsor) will be required – by the lender and/or by other equity investors – to invest their own money as some portion of the equity to have skin in the game. Equity investments carry the greatest risk, because investment agreements entitle every other tranche of capital to be repaid before common equity holders. However, if the property development does well equity investors usually receive an exceptional rate of return. This is because they receive a portion of profit which can easily outstrip the return paid to debt holders usually expressed as an interest rate.

For example, a sponsor may have sourced senior finance at 6% per annum, mezzanine finance at 22% per annum but the sponsor and common equity holders return on investment is 50% per annum. Another way to think about it is that common equity is very expensive when compared to debt within the capital stack.

Understanding the stack is incredibly important as certain lenders will only become involved in particular types of property development finance and interest rates will vary depending on the risk. Currently, Private Mortgages Australia provides Senior Debt and Mezzanine Debt, and have aspirations to offer Preferred Equity in the future.

If you’d like to discuss finance for your next property development project then please get in touch.

Funding options for settling a development site

Funding options for settling a development siteIn 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 is Director of Holden CapitalDan 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].