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.
- 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 Finance Options
- 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
- 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.