10 Questions Lenders Ask When Funding Property Developments (Part 2)
Welcome to part two of our blog series, where we explore the top 10 questions lenders and finance companies in Auckland will ask during the application process. The previous blog post covered the first five questions lenders will ask. In this instalment, we will delve into questions 6-10 which span everything from your initial funding requirements to GST implications. Let’s take a closer look!
(6) What is your funding requirement?
For obvious reasons, your development funder or non-bank lender needs to know how much funding you require. This can normally be broken into two components.
- The Initial Advance (used to assist with a refinance of an existing mortgage, or an initial cash advance towards land settlement); and
- The Progress Payment Facility (to be allocated toward project costs on a cost-to-complete basis)
Most development funders will lend on a first-mortgage basis only, meaning any existing mortgage must be refinanced as part of the finance package. You must consider this part of your ‘funding requirement’.
Lenders will assess your funding requirement against internal guidelines for loan-to-value (LTV) and loan-to-cost (LTC) ratios. It is important to remember that each project is assessed on its own merit and these ratios may vary depending on the location and type of project.
Be prepared to discuss your project budget at a high level. These include things such as land acquisition costs, construction costs, and subdivision costs. Lenders will assess square meter rates and whether your construction construction costs are realistic. Anything that doesn’t quite stack up may raise a potential red flag for your project, including low construction costs or inflated land prices.
When applying for development funding with ASAP Finance, we thoroughly review your project budget in detail to ensure that you have included all costs required to complete the project. This should include allowances for: professional fees, council fees (such as development constitutions), utility connections, civil works, and construction as well as an appropriate contingency.
(7) What is the development programme?
Lenders will want to know how long the development is expected to take, as this will impact their risk assessment. A longer development timeline may increase the lender’s risk, while a shorter timeline may decrease it.
Lenders will use this information when considering an appropriate loan term. However, this is something you the developer should also consider. Should you accept a loan term that is shorter than your development programme you expose yourself to opportunistic lenders who may look to re-price your loan or provide unfavourable loan extension terms. Keep in mind that finding a new lender mid-construction is extremely difficult so your options will be limited.
(8) What is your plan for repaying the loan (exit strategy)?
Whether you plan to sell the completed development or retain the properties, discussing your plan for repaying the loan is crucial at the start of the funding process.
Do you intend to retain the properties after completion? You lender will need to see that you have the financial capacity to meet the long-term mortgage requirements of traditional lenders such as major banks or ‘near bank’ lending institutions.
If you plan to sell the units, your lender will want to know what your sales strategy will be and if you have any pre-sales prior to drawing down. Your sales strategy should encompass whom you intend to market and sell the properties, likely asking prices and when you plan to start marketing the development. Any presales should be bank quality as we discussed in our guide to exit strategies.
Holding or selling the properties on completion will also have implication on the way GST is treat and internal LVR calculation for the lender.
(9) Are you GST registered/have you and will you be claiming GST?
The majority of the projects we fund are built to sell. Thus most of our clients will be GST registered and will have claimed GST against the purchase price of the land purchase and will similarly be claiming GST on construction costs. This also means that GST will be payable when you sell down the units.
If GST is payable on the sale of the houses on completion, we need to deduct GST from our end values when calculating LVRs. For example, if we decided the maximum LVR for a project is 70% against an as-if complete value of $1,000,000 including GST, then the maximum loan facility we could offer would be c.$608,000. [Calculated as $1,000,000 / 1.15 (GST) x 70%].
If a client GST registered (and is claiming GST) we can fund projects on a GST-exclusive basis, using a separate GST facility to fund the GST. A GST Facility is a revolving credit facility that is used to exclusively fund the GST portion of a Progress Payment. Funds drawn down from this facility to pay GST are repaid by the IRD in the form of a GST Refund. Using a GST Facility enables a lender to fund a project on a GST-exclusive basis, at the same time ensuring that all contractors are paid in full (the GST inclusive amount). In other words, using a GST Facility reduces the amount you need to borrow from a lender by approximately 15% (less the GST facility itself).
(10) Who have you engaged as your main contractor/who are your key project consultants?
In our experience, the most successful property developers are those who have built the best team. This spans everything from solicitors, accountants, contractors and other project consultants.
As a lender, we will be interested in understanding your consultants’ and contractors’ qualifications, experience, and track record of completing similar projects on time and on budget.
Having a team with relevant qualifications, insurance and licenses, it will demonstrate to the lender that your project is managed by experienced professionals who are able to effectively oversee the development and navigate any potential challenges that may arise.
Having a reputable, experienced and well-respected project team will not only help ensure the project is completed on time and on budget, but it also reduces risk for the lender, increasing your chances of securing funding.
Be prepared
Securing funding for your property development can be challenging, but understanding what information is relevant to your lender can make the process less daunting. By understanding and learning how to address common questions lenders ask, you can increase your chances of securing funding. When considering your application, lenders look at a variety of factors such as location, development nature, project team, exit strategy and more. By being aware of these factors and knowing how they align with your project goals will enable you to present a strong lending proposition. Remember, a lender wants to invest in feasible projects backed by a good team and have a good ROI. Keep these in mind so you can increase your chances of success.