How to finance your property development project?

By Amber Khanna | Property Development Finance

Dec 10
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. To begin with you need to understand the three stages of property development finance.

Stage 1 - Land Acquisition

Private Funding / Seed Capital

  • Usually required in the conceptual stage.
  • Covers cost of consultants
  • Everything required to put together DA or Planning Permit Application.
    • Reports
    • Consultants

Land Acquisition

  • Usually a retail loan.
  • Must have an existing house on it.
  • Long term loan.
  • 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 their own money.

Stage 2 - Construction Loan

  • Interest only & often capitalised.
  • Lender may or may not finance GST costs.
  • Interest is calculated on drawn down amount.

Stage 3 - Retail Loan

  • Develop & Hold
  • Offset Account
  • Line of Credit
property development blueprint

Property Development Finance Options

Bridging Loans

  • Used to quickly move on a deal.
    • Typically refinanced after a short-term with another lender.
    • Comes at a higher interest rate
    • Often used to obtain planning permits
    • Comes from a specialised lender willing to take the extra risk.
    • Caveat Financing

Mezzanine Finance

  • 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 getting started guide on property development.


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About the Author

Property Developer | Educator | Entrepreneur Experienced in Development Management, Financial Modelling, Land Acquisiion and Development Finance.

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