10 Questions Lenders Ask When Funding Property Developments (Part 1)
Securing funding for your property development can be challenging , but understanding what information is relevant to your lender can make the process less daunting. This blog post will be the first in a two-part series where we break down some of the critical questions you can expect a lender or property finance company to ask, so that you can better prepare for your next development funding pitch.
Please note that this is not an exhaustive list nor a comprehensive guide to all the questions your lender may ask. Instead, we are aiming to provide insight into some of the more common questions lenders pose, and the reasoning behind why they are relevant. Lenders use these discussion points to determine whether your project fits their credit criteria.
Here are some of the questions you can expect, along with the reasoning behind why they are crucial:
(1) Where is the project located/what is the property address?
Lenders will often have different criteria based on geographic locations. ASAP Finance prefers to offer property developments loans for projects in main urban centres such as Auckland, Hamilton, Tauranga, Wellington, Christchurch and Queenstown. This is primarily due to the greater liquidity (transaction volume) in these markets, making it easier for clients to a sell property and repay their loan(s).
The specific property address reveals more detailed property attributes, such as whether the property is in a desirable area, site aspect, contour of the land, location to services and amenities, and underlying zoning. As lenders, we must look out for any property attributes that make funding your project more challenging, such as a poor location or lack of access to services.
(2) Who owns the property/what entity will be undertaking the development?
The property owner tells us who the borrower will be. Most clients undertake projects under a Limited Liability Company (LLC). However we also fund projects where the development is being undertaken under a trust, limited partnership, or personal name. We recommend seeking professional advice from your accountant concerning the best structure to use for your project.
If the project is to be undertaken by an LLC or other investment vehicle, we will want the director and key sponsors to guarantee the loan. Understanding the parties involved in the transaction, and the role that each party will play, is something we will cover with you as part of the application process.
Properties owned under personal names can be an issue. This is because there may be CCCFA implications if the property is owner-occupied. Many non-bank lenders do not write CCCFA loans, which means if the property is owned under a personal name and is owner-occupied, we will not be able to assist you with your project.
More complex structures such as trusts and partnerships have a high threshold for AML, and may also require a more detailed explanation as to how partners are introducing equity in the project and the source of those funds.
(3) What is the nature of the project, i.e. what are you proposing to build?
Of course, each lender needs to know what they are funding, but understanding what you are proposing to build also gives us further insight into the overall feasibility of your project. We will be assessing:
- The complexity of your proposed development and relative risk weighting (e.g., residential townhouses, apartment complexes, and subdivisions all have different risk attributes).
- Whether your product is suited to the location you are proposing to build in.
- The expected demand for your product in that location.
- Whether your costings accurately reflect what you are proposing to build.
(4) What stage of the development lifecycle are you in? Have all necessary consents been obtained to begin the project?
Lenders generally priortise build-ready transactions (ie. ready to draw down) versus those further away from starting construction.
Most funders will only provide full development facilities when they know construction can begin shortly thereafter. Approving a loan that is too far away from drawdown increases the risk of the market changing between the approval and when construction starts.
Rule of thumb: apply for development funding when you have your resource consent, engineering approvals, and your building consent has been lodged (but is yet to be approved).
(5) Do you have any previous experience in property development?
We will want to know if you have any previous experience in property development, as this can provide insight into your ability to complete a project successfully. Lenders will look for a track record of completed developments and assess your ability to complete the project successfully. Building a CV to showcase recently completed projects is an excellent way to demonstrate your capabilities. For those new to development, focus on building your development team – to a certain extent, the experience can be bought!
Next steps
Securing funding for your property development can be a complex process, but understanding the relevant information your lender can make it less so. This blog post is a two-part series that aims to break down some critical questions you can expect your lender to ask. Stay tuned, for part two where we explore further questions your lender may ask.