Throughout our time in the industry, we see a lot of common errors made when looking for property development finance. To help you avoid these, we’ve listed the top common pitfalls we see below.
Pre-Sale Contracts
Pre-sale contracts confirm the repayment of debt for the lender. It is therefore important to ensure that they have the right format and conditions. Some clauses to pay extra attention to are;
Sunset Dates
Sunset dates for completion of the project are often set too soon after the expected completion date. The minimum a lender will accept currently is 12 months post the expected completion date.
Deposit amount
The deposit amount is often understated. A lender will require a minimum of a 10% deposit to be paid and held in trust. In some scenarios (such as overseas purchasers) a 20% deposit will be required.
Substitution Clause
This is a clause that allows for the substitution of materials during construction. This is important, particularly in the current environment, as if there are delays or shortages of materials, this ensures the project continues and is completed on time.
Build Contract
The form of the build contract is important, particularly on larger projects. Things that can be overlooked are;
- Performance Bond
- Liquidated Damages
- Retentions
These are all items that allow for leverage during the build for the developer. They can be important to ensure the contractor performs their obligations under the contract.
Quite often a development manager or quantity surveyor can assist with negotiating your contract to ensure these clauses are adequately captured.
To learn more about pre-sale and build contracts and why they're important to the success of your development, check out our guide here- The 5 Key Contracts for a Successful Development.
Communication with the lender
Often, borrowers can be intimidated about being open and transparent with the lender about what is happening during a development. It is crucial that you keep open and honest lines of communication with the funders, as this will ensure that if anything becomes difficult, you will have a lender who is more likely to cooperate with you.
GST Treatment
We are often provided with feasibilities that haven’t accounted for the GST treatment correctly. A common mistake includes taking the GST amount off the sales values but not off the costs, resulting in a greatly overstated margin. Another is showing everything inclusive of GST where, because the sale price is a larger number, the margin figure can also be overstated.
Want more info? We cover the above and more in our Development Finance Guide. Download it here.
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