How much does it cost to secure a development finance loan? We are often asked how much the finance costs are, however, often missed are the costs that you may incur in securing the lending for the development. These are expenses that can be incurred before a formal approval is secured and therefore are required to be funded with cash from the developer. We explore below what these may be and what the typical cost of those items are.
Valuation
Most lenders will require a valuation as part of their approval process. This is normally comprises an estimate of the current value of the property (an ‘as is’ valuation) and an estimate of the value on completion (an ‘as if complete’ valuation).
We recently discussed these in a bit more detail on another blog.
The cost of this valuation can vary depending on the size, scale and complexity of the development, however, we believe a best estimate of around $5,000.00 - $10,000.00 + GST for this cost is fair.
Quantity Surveyor
Some property developments will require a Quantity Surveyor to prepare a pre-construction report and monthly drawdown reports for the lender. Normally this will be projects where there is a level of inexperience from the developer or they are larger in nature.
Whilst the monthly drawdown reports occur during the project and the cost of these is funded from the development loan, the pre-condition report will be required before the development loan draws down. It is therefore often funded by the developer as part of their equity contribution.
The cost of a pre-condition report will vary as with the property valuation depending on the size and complexity of the project, however, a fair estimate for a standard pre-construction report would be $5,000.00 - $7,500.00 + GST.
Legal Bills
There are several legal costs involved with property development that are not often considered. A number of these can be covered by the development loan, however, some will be required to be covered by the developer.
Some of these might include costs with advising and preparing a pre-sale agreement, review of loan documentation, preparation of entity structures and other advice. There can also at times be unique costs such as neighbours consents for EPA requirements or removals of covenants, additions of easements or other items required to facilitate a development that can add up in cost.
The costs again vary, however, it is prudent to set aside $5,000.00 - $10,000.00 for these costs as well as other legal bills during the development.
Real Estate Agent & Sale Costs
You may consider selling units off the plan when pursuing a development. This could be a requirement of a funder or prudent risk management yourself. Some lenders will require a sales target to be met prior to advancing any funds and therefore securing these would become a developer funded cost. This process can attract some significant cost.
The initial costs would comprise any marketing you pursue. This will again differ from agent to agent and how heavily you seek to market the properties. Some agents will charge a nominal or no marketing costs but rather higher agents fees and others may get you to cover the marketing spend in full.
Typically we would estimate $10,000.00 - $20,000.00 for a marketing campaign pursuing pre-sales.
Further, if you make some sales you may have a requirement to pay agents fees. All agents charge differently, however, some will require you pay a portion or all of the fee on unconditional date. Naturally the cost of this will vary depending on the agents terms, costs and how many units you sell, however, it can be a very significant.
If you estimate $25,000.00 + GST per property when the contract goes unconditional then sale of 4 properties would cost you $100,000.00 + GST.
Accountant or bookkeeper.
Establishing your entities structure and managing the ongoing accounting and financing requirements can be a cost that you incur prior to establishment of the development loan.
You may require an accountants assistance in registering for GST, filing GST claims and filing any accounts. Your accountant may also help you structure your entity to achieve the most optimal tax status or structure to allow holding of units on completion.
Again, depending on the scope and complexity of work the costs will vary, however, most standard developments will require no more than $5,000.00 allocated towards this.
Overall, there are a number of costs that a developer should be prepared to pay for and these can add up to be significant. Ignoring any costs affiliated with pre-sales the other items alone can tally up to be greater than $32,500.00 + GST. Having a budget allocated to these items and cash set aside as a contingency is crucial to the success of a development.
If you have any questions, reach out today.
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