Property Development Finance - How To Finance Your Property Development Project?
Property Development Finance is very different from normal retail finance. Watch the videos below, to get a complete understanding of how you can finance your property development project.
If you are new to Property Development, I would recommend that you first read the following three articles as the information in these articles is interrelated and you will understand the property development finance section much better if you under stand the Property Development Process first.
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To begin with you need to understand the three stages of property development finance.
How To Finance Your Property Development Project?
Stage 1: Private Funding / Seed Capital
- Usually required in the conceptual stage and funded by the property developer. also known as developers equity.
- Covers cost of consultants and more often than not will also need to cover the development approval soft costs or permitting costs.
- Everything required to put together DA or Planning Permit Application.
Stage 2: Land Acquisition
- Usually a retail loan.
- Must have an existing house / dwelling on it for it to be a retail loan.
- Usually a Long term loan & can be both principal + interest as well as interest only with a shorter term.
- When purchasing just land - lender will only consider if it is part of a full development loan.
- Lenders do not like land banking loans.
- Land Sub-Division
- Lender may require you to first secure the raw land with your own money.
Stage 3: Property Development Finance - Construction Loan
- Interest only & often capitalised.
- Lender may or may not finance GST/VAT costs.
- Interest is calculated on drawn down amount.
Stage 4: Property Development Finance - Retail Loan
- Develop & Hold
- Offset Account
- Line of Credit
Property Development Finance Options
- Used to quickly move on a deal - more like not letting an opportunity pass by, so you developers often use a bridging loan and later refinance through another lender. Designed more to complete a transaction.
- Typically refinanced after a short-term with another lender.
- Comes at a higher interest rate
- Often used to obtain planning permits & cater to soft costs i.e. consultants, reports, permits etc.
- Comes from a specialised lender willing to take the extra risk & they would charge you a higher interest for taking that extra risk.
- Caveat Financing
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- Debt Capital that gives the lender the right to convert to an ownership or equity interest in the company if the loan is not paid back in time & in full.
- Used by developers to secure additional financing for development projects, where there is a shortfall of equity required by the main or senior lender.
- More expensive - because it's secured by a 2nd mortgage. Since it's 2nd in line i.e. if something happens, 1st mortgage holder (senior lender) gets paid out first and then the second lender gets paid.
Non-Recourse Loan / Debt
- Secured by collateral, real property, but the borrower is not personally liable.
- If the borrower defaults, the lender can seize the property pledged as security - but the lender's recovery is limited to that property i.e. the lender cannot come after the borrower even if the collateral does not cover the full defaulted amount.
- LVR is only 50-60% of Valuation.
Read the how to become a property developer for more FAQs.