Borrowing against the future value of your project can help prevent costly delays and provide you with a very workable ongoing source of property development finance.
Whether you’re an experienced campaigner or wondering what development finance is all about, read on to find out more.
Borrowing against the future value of your project offers many advantages for property developers, but believe it or not, most lenders don’t fully consider end value when assessing development finance applications. That doesn’t make sense, and it can prove highly puzzling for many first-time and experienced developers alike.
The business of development is all about unlocking potential value. Optimal ROI depends on a finance solution enabling property developers to take advantage of potentially profitable opportunities. It demands funding options that allow developers to smoothly move between project phases and projects. And when there’s a market downturn or similar, effective commercial development finance lenders should afford developers the time to wait it out.
It’s unfortunate that most property development finance lenders out there don’t offer products that developers need. If you’re wondering, what’s development finance all about? If you’re confused by how challenging it seems to secure funding in such a lucrative market. If you’re sick and tired of chasing your tail and then being forced to achieve ridiculously high pre-sales to access a relatively small chunk of your development costs, you came to the right place.
This article will look at end value-based property development finance options.
GRV Vs. TDC: The adverse effects of inflexible property development finance lenders
GRV is the gross realization value of a development or construction project. When the product is complete and ready to sell, it’s the sum of its value. GRV is powerful, but non-bank financiers predominantly use it. Neither banks nor private lenders will take unwarranted risks. Still, in the current traditional lending climate, the fact is that for developers, many banks will only fund a portion of a project’s total development costs (TDC). Coupled with that, they often specify high pre-sales requirements, which can be both prohibitive in getting developments started and detrimental in achieving an optimal return.
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Before the project starts: Pre-sales, marketing, and project delays
That can often leave many developers feeling like they’re taking the majority of the burden on projects, even though they’re still expected to produce – and the bank demands – a return on their investment. Being forced to pre-sell up to half the apartments, offices, or houses on a project and the associated costs and effort of marketing – can see developers firmly on the back foot before a project even gets out of the ground.
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During the project: Ongoing delays and compromised ROI
Traditional development finance doesn’t only lack suitability when projects begin. Developers can feel the adverse effects right up until project completion. It starts with the application process. Banks can’t compete with private mortgage managers regarding speed and efficiency in turning applications around. They lack real estate know-how, and lengthy applications cause further delays for developers. Then, funds get released throughout the project according to defined project phases – typically with time-consuming inspections between each stage. Every minute spent pandering to the bank is a minute longer on site, and that can all add up to leave developers feeling a notable financial pinch.
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Project exit: Starting new projects can be challenging
The challenges don’t end when the building work is finished. At the end of projects, banks and traditional commercial development finance lenders offer little flexibility to developers working in a fluctuating market. When construction ends, and finance is due, developers are often forced to sell stock quickly – irrespective of market conditions. Already burdened with significant pre-sales and off-the-plan of sales, often for diminished returns, developers must offload remaining stock fast to pay banks, and that often results in compromised ROI.
Property development finance lenders in Australia: Gross realization value
GRV might be highly advantageous for developers, but that doesn’t mean things have to get complicated. Private mortgage managers like Agility still assess projects strictly on their viability and use many of the same factors to establish that as banks, with one primary exception:
- We examine the plan and schedule for your development project.
- We look at zoning, your DA, and what you plan to build. Is there a market for the stock in the area?
- We look at your financial or development track record
- How profitable is the project, and what’s your exit plan?
- What’s the gross realization value (GRV) of your project?
GRV doesn’t compromise lenders, developers, or investors. It’s about looking at the value and equity in early-stage developments and converting that to more efficient, cost-effective funding options. The primary difference is that once you and your project tick the appropriate boxes, a private mortgage manager then looks beyond the existing situation on site – in much the same way you did when you embarked on the venture. In essence, personal property development finance is a lot more about what a project and a developer are capable of returning.
Mortgage managers work to the same financial checks and balances as a bank or traditional commercial development finance lender, specializing in construction and development. That added expertise allows them to provide tailored solutions specifically designed for builders and developers who work in a challenging field.
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Before the project starts: Seal deals and get to the site more quickly
Flexible property development finance means developers are freer to get projects started, often entirely without the need for the burden of pre-sales. Not only that, but applications tend to be faster, too, because appraising projects on the merit of expected returns present a lower risk for lenders. There are fewer conditions and intricacies in agreements, and the result is that the application gets faster. Here at Agility, we often help clients arrange development finance when competition for land is fierce. In a fast-moving property market, agreeing to fund quickly and easily gives developers a distinct competitive advantage.
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During the project: Fewer hold-ups and requirements
There are fewer or no time-consuming lender inspections during the build, and the resulting wait times for phased funds to get released. Not only that, but because private mortgage managers look at future value, developers can often access a significant portion of land costs and sometimes, all of the total development costs. The result is a better way to fund ongoing development. Contractors get paid on time, and schedules remain intact. Every experienced developer knows that program creep associated with patchy funding can turn into extra on-site months during a relatively lengthy project. It eats away at your profit and causes endless logistical problems.
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Project exit: Flexibility and moving between projects
The benefits of future value don’t stop when that future arrives. Whereas a bank will be eager to have you settle up at the end of a project – even if that means cutting the price of your stock and reducing your returns, with a private mortgage manager, you can use the equity tied up in unsold apartments or houses to give you more time to achieve a better price for the stock. Not only that, but when you’ve already identified your next development challenge and are eager to get started right away, you can use the equity in your finished project—no more getting stuck on a completed venture trying to sell the stock under its potential value. You’re less likely to miss out on a lucrative new opportunity because of pressure from traditional commercial development finance lenders.
Property development finance lenders: How to use future value to unlock ROI
Cost-effective property development finance is all about leveraging the future value of projects to reduce time on site and maximize ROI. There are several ways developers can do that:
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Fund the ongoing costs of development:
Cash flow is a priority for builders and developers. If it dries up temporarily during a project, it can spell disaster and cause knock-on delays. GRV allows private mortgage managers to provide a proper end-to-end funding solution for your project.
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DA uplift:
It’s not uncommon for developers to buy a block of land and then spend time and effort obtaining a DA for their project. That results in a significant increase in land value which a developer can use to fund ongoing works. If, for example, your land increases by 30% in value once you get a DA approved, Agility can advance the funds so you can start on site. Likewise, if your land value rises while you’re waiting for a project to begin, you can use the added equity in the same way.
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Exiting and starting a new project:
Traditional lenders may cause you additional problems when it’s time to move on to a new project. They’ll be wholly concerned with repayment of your development loan, while you’re more likely to be looking for funding to start a new project. With a private mortgage manager, you can leverage the equity in your current completed project to get a new venture off the ground. The bank won’t let you do that.
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Residual stock equals potential ROI:
The last thing you need at the end of a project is to compromise ROI. While the bank might demand you sell the stock off at lower prices so you can repay a development loan, a private mortgage manager will consider the equity in the store and allow you more time to get a reasonable price.
The bottom line: Private mortgage managers that think more like property developers
Banks and traditional brokers work across many verticals, providing personal loans to residential mortgages and vehicle finance. While that’s great if you want to release equity in your home to buy a car, it’s rarely ideal for specialized commercial property developers who need an end-to-end, versatile development finance solution that’s equally specialized. The result is that much property development finance ignores developers’ primary concerns. Non-specialist funding agreements can compromise the holy grail of developers – their ROI.
Agility operates only within the commercial property development lending space. That means we can deliver custom development finance solutions that go much further for our clients and reduce or eliminate factors that gradually drain your ROI. We’re specialists in property development finance, speak your language, and we can help you unlock the future value of your project to produce seamless ongoing funding options that ultimately cost less.