Many items are needed to get a development finance loan, below we have sought to put together a comprehensive list of what you should prepare for your development finance application.
This is a very detailed list and we have therefore sought to split that out into the ‘must have’ and the ‘nice to have’. As always, however, the more detail you have prepared at the time of an application the easier that process is likely to be.
Must Have’s
The below is a summary of the items that we consider the minimum bar for a development finance application. With these we can normally put an application together, however, more detailed information (per the following section) is preferred.
Signed Engagement Letter.
The first thing we often seek from a borrower is an engagement letter. This is a document that clearly details what we as the broker are engaged to achieve, the costs for that and timing thereof.
This is an important document for two reasons. Firstly it offers a level of protection to us as a business as we are normally only paid on a success basis (i.e. when the development loan draws down). There is a great amount of work that goes into a development finance application and as a business we seek some surety that we will get paid if successful.
Also, most lenders will want to understand that the broker is formally engaged and that it is on an exclusive basis. This is so they can better manage their risk and understand how likely it is the borrower will proceed with them.
Unfortunately, it is quite common for borrowers to engage with multiple parties warranting the above. Engaging with multiple parties also places the lending application at risk as there is less control as to who will see the application, the form it will be presented in and a risk that word will make its way around the market damaging the reputation of the transaction and client.
This is also important for the borrower as it clearly defines the terms of the engagement and costs. This can limit the scope for the broker ensuring they do not operate outside of the borrowers intended remit and that the costs are known in advance.
Detailed Feasibility.
This is the cornerstone of most development finance applications. We have put together a guide on how to put one together along with a template to use. With most applications it is the first item we and the lender will review and therefore vital to the application process.
It is a detailed budget for the development including all revenues and costs. It is used to determine the level of borrowing required and what the development can support. We as brokers and lenders will also test the revenues and costs included to determine how they line up compared to similar projects in the market. This will include things like the sale price of the properties, cost of construction per square metre, civils budget, local authority costs, contingency and other items within the budget. It is a good opportunity to ensure the budget is a fair determination of cost and return.
This is an absolute necessity for a development finance application.
Stamped Resource Consent Plans and Conditions.
These are almost as crucial as a feasibility. The stamped resource consent plans and conditions provide an enormous amount of information for the project. Firstly, resource consent is the crucial document from the council granting permission (or consent) for the project to proceed. Without this a project cannot proceed and a funder is unlikely to consider financing the application until it is in place.
These also provide detail as to what has been approved to be built on the subject property and the conditions that need to be met during that construction.
The plans will be reviewed by both ourselves and the funder and inform a view on the project. Like it or lump it, the look of a project will impact on its perceived value and market acceptance of the product. Lenders will often look into the product being developed and may inform their lending approval on this. It might mean a pre-sale requirement is included or further equity. Certain types of properties will carry greater considerations from lenders such as one-bedroom units, multi-level construction etc.
The conditions will also be read in detail to understand what the council has required to partake in the development. We explore these further in our Resource Consent Conditions Blog. These conditions can have a material impact on the timing, cost and progress of a development and are therefore crucial to understand.
Statement of Position
An important consideration for a lot of lenders is the strength of the sponsors statement of position(s). Whilst projects will be funded on a cost to complete basis and carry a contingency within the budget, lenders like an idea of the sponsors capacity to inject further funds into the project if required.
As each project will also carry a personal guarantee, a sponsor with a good statement of position will have more to lose and therefore likely be heavily invested in a positive outcome for the project.
Photo ID
Whilst as a business we are not governed by Anti Money Laundering (AML) legislation most lenders we deal with are. We always seek photo ID as part of our application process, as well as often meeting the client, so that we can confirm to the lenders that the sponsors are real people.
Nice to Have
Sale and Purchase Agreement (SPA) for the land.
For development sites that were purchased recently (within the last 12 – 24 months) we will seek a copy of the Sale and Purchase Agreement (SPA) for the land acquisition. This is particularly important if the goal is to settle straight into a development loan.
The agreement will confirm the price paid for the property, the date of the sale, conditions of which and many other important details. It is also an important tool in the AML process for a funder to ensure the land was acquired fairly and at a market value.
Stamped Building Consent Plans and Conditions
Whilst these aren’t always necessary for the development finance application, often building consent is required before a development can get underway. A building consent will detail the materials and process for construction to ensure that it is carried out with NZ Building Codes.
Site works may get underway on a project without building consent, however, building consent will always be required for any level of construction including certain sized retaining walls. It is a crucial item to ensuring the programme is met and therefore an important thing to have or understand the timing of for the development finance application.
We can see people split out these consents where there are multiple units or blocks of units in order stage the completion of a project. This way each individual consent may be closed off (CCC) allowing for settlement of those particular units prior to the others being completed.
Engineering Planning Approval (EPA) or equivalent
This is the engineering approval for a development project. It is normally related to the civil works and connection to services for a project. It is required for most developments before they can get underway and is therefore important to understand as part of the development application process (whilst consent itself may not be 100% necessary at the time of application).
Often it will detail how the development is going to tie into the Stormwater, Wastewater and other infrastructure services. These are crucial items for a development and can involve significant delays in programme and cost to a project.
This consent may determine a requirement to do some work or tie into council lines that sit within a neighbours boundary and therefore require a neighbours approval. This in itself is a very important document as without it you cannot carry out the work and if done incorrectly it cannot be enforceable a major problem in itself.
Quantity Surveyor (QS) Report
Some lenders will require a Quantity Surveyor to assist them in managing the risk on the project. The detail as to what a QS will do can be found here.
One of the first things a QS will do on your project is produce a report that details all the key items for a project including the budget, programme, consents, contractors and their contracts and many other items. This report will inform the lender around risks and crucially often the budget the QS provides will be the one adopted for a project. A QS may determine a higher level of contingency or other line items is required for a project and if so either the funding limit or sponsor’s equity may need to increase.
Having a copy of this report prior to the application will help to ensure that the funding provided (or equity required) is sufficient to complete the project. It will also help to cover off the risk items for the project which may speed up the approval process for the application.
Not all funders or projects require a QS, however, and so at times it isn’t efficient to get this in place before your funding approval. It is also important to understand that not all QS firms are acceptable with all funders and therefore engaging with your broker before instructing the QS is important.
Valuation ‘As Is’ and ‘On Complete’
Most (not all) funders in the market will require a valuation as part of their finance approval. There are two types that are normally requested being the ‘as is’ value and the ‘on complete’ valuation. Details on these can be found on our valuation blog.
As Is
This is a determination of the current market value of the property ‘as is’. It is normally completed on a highest and best use basis and will account for consents if in place at that point.
An ‘as is’ valuation will often be required if the property was purchased more than 3 – 6 months ago to determine its current market value. Lenders will have some constraints as to their opening leverage position on the property itself and therefore it is important to understand the current market value.
As If Complete
This is a determination of the value of the completed units in a development. This will inform the Gross Realisable Value in a project and thus drive the possible facility limit for the funder.
Most funders will be limited to a Loan to Value Ratio (LVR) of 70% or less for a development. This will be based on either the valuation or the pre-sales in place (or a combination of the two if some units remain unsold). Normally a lender will adopt the lower of the two, unless there is a strong mitigate (such as a Kainga Ora / Government contract) not to.
Funders may require a valuation even if you have secured sales in the project. This will be to confirm that the sales are in line with the expected market value.
Pre-Sale contracts and summary
Where there are some sales in place a lender will want to review the contracts and key terms of those. Most often we will provide a summary of these to the lender as part of the application process and they may defer a full review of the contracts to their solicitor.
It is important to understand the nature of these sales and ensure that they qualify, detail about what is looked at can be found in our blog on pre-sales. Key items that we will identify in our summary include;
- Unit purchased
- Date of contract
- Purchaser
- Purchase price
- Deposit paid
- Sunset Date
- Personal Guarantee (if applicable)
- Purchasers Solicitor.
- Real Estate Agent
Marketing plan
Where the intent is for the sale of the units in a development project and there is remaining stock at the time of funding a lender will want to have an idea around the sales strategy for the project to ensure there is a plan for the loan being repaid on completion.
This may be high level on a smaller project where the sales won’t be undertaken at all until close to completion. It could feature some detail about which agents will be engaged and timing of bringing those to market.
On larger projects (20 + units) lenders will expect to see some marketing and sales of the units throughout construction as it can take time to contract enough units for the debt to be cleared and therefore they seek comfort that these will be marketed and sold down prior.
Civil and Build Contracts
The civil and build contracts are naturally crucial items to have locked away for a development loan and therefore great things to have as part of the application process. However, despite this there are a lot of finer points to a construction contract and therefore we recommend not having this signed until it has been reviewed by both your broker and lender.
There are different types of civil and construction contracts and these will determine things like payment terms, developer and lender mechanisms for recourse against the contractor, contractors rights and many other items. Often a lender will require specific items be included (or excluded) and therefore having this reviewed and signed off before formalising is crucial.
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