There are 3 key pillars to development finance- Experience, Exit and Equity. Whilst that isn’t an exhaustive list of criteria for lenders, it takes you a long way with any property development project.
Equity
This is how much cash you have put into the project. Main banks will require you to contribute 25 - 30% of the TDC as equity before considering the project. A non-bank lender will stretch this further; most will go up to 80 – 85% of the TDC (limiting equity to 15 - 20%) and some may even stretch as far as 100% of TDC (no equity!) for very robust projects where all other risks are adequately managed.
Exit
This is how the loan is going to be repaid. Most development facilities are repaid from the sale of the end product. In that instance, a bank will want this secured before they lend any funds, and therefore require pre-sales.
Most banks will seek 100%+ pre-sale cover of their loan. This means the total sales net of GST and agency fees are equal to the total debt on the project. $1 of net sales for every $1 of debt.
Non-bank lenders are more relaxed around this criteria, sometimes requiring no pre-sales at all. However in the current environment, most are seeking some level of cover for a loan.
Experience
An important part of any application is a client’s experience with property development. Development is a complex and risky business and those that have good experience are better able to navigate the process.
For this reason, lenders prefer borrowers with property development experience.
Quite often this gap can be bridged (at least partially) by engaging with experienced professionals and consultants. This includes the quality of the builder, QS, Project Manager, Broker and other professionals.
Want to learn more? Check out our free Development Finance Guide here.
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