How Cost-to-Complete Funding Works in Development | ASAP Finance

How Cost-to-Complete Funding Works in Development

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At ASAP Finance, we work closely with our clients to understand their development finance needs, then craft bespoke funding solutions that transform property ideas to reality.  

When we create a loan facility, we analyse each ‘input’ required to complete a project—considering elements such as planning, design, construction and delivery. In addition, we take into account the relevant experience of the developer and project. Finally, we apply these considerations against ASAP’s credit criteria which will ultimately determine how much we can lend to you: the Developer.

In some instances, we may be able to lend the full cost to complete the project. In other instances, the Developer may be required to contribute toward covering a portion of the project costs. If so, these funds need to be introduced into the project before our funding can be utlilised. This process is called funding on a ‘cost-to-complete’, and is a fundamental principal of construction funding.

The Process: What You Can Expect

(1) Before a development facility is put in place, a lender will require a detailed development budget to be prepared and submitted by the client. This will include items such as land purchase, soft costs (planning, consenting, professional fees), hard costs (civils and construction) and other line items such as utility connection charges, development contributions and appropriate contingency.

(2) Undertaking detailed due diligence, the lender will establish the total loan amount that they can provide to the client. The lender will work backwards to identify how much of the total development costs they are able to fund. The maximum amount a lender can fund will vary depending on their specific lending criteria. Any shortfall between the proposed loan facility and the total development budget will need to be funded by the client upfront.

(3) The developer’s equity is introduced into the project first to cover any shortfall between the lender’s loan facility and total development costs. This ensures that the lender is retaining 100% of the cost to complete the project within their loan facility.

(4) The size of the developer’s equity contribution will vary depending on the size of the lender’s loans facility. For example, the developer may be required to only cover some of the acquisition costs with the lender funding the design and build. In instances where there is a substantial shortfall, a greater equity contribution may be required, and the developer may need to complete the design, consenting and a certain percentage of physical works.

(5) Once the required equity contribution has been met, the lender will then fund the balance of the work required to complete the project. Future payments are always made on the basis that the lender’s loan facility continues to be equal to the projects budgeted ‘cost to complete’.

An example of a construction loan’s payment stages:

Let’s look at a simplified example where a developer wants to build some town houses on a previously acquired plot of land. For simplicity, let’s assume the total construction costs are $10 million and the lender has put in place a $6 million loan facility. This would require the developer to cover $4 million of costs (or 40% of total outlay). Their payment structure could look like this:

Client funded

Stage One: 20% – Site works, permits, foundations

Stage Two: 20% – Wall and roof framing

Lender takes over funding.

Stage Three: 20% – Cladding + Internal lining, plumbing and electrical

Stage Four: 20% – Internal fit-out and finishing including kitchen and bathrooms

Stage Five: 10% – Landscape and Driveway

Stage Six: 10% – Final payment and issuing of Code Compliance Certificate (CCC)

Why do lenders fund on cost-to-complete basis?

Keeping an accurate budget and a close eye on the cost to complete ensures a project can be taken to completion with the resources available. Lenders always prefer to fund the ‘back-end’ of the project as it affords them a degree of control over the construction budget and capital allocation. Funds are less likely to be misappropriated or allocated toward items that are ‘unfunded’ and that could result in a project running overtime and over budget.

The Advantages of Cost-to-Complete Funding with ASAP

At ASAP Finance, we work alongside our clients to assist them in building out feasibility studies and development budgets. This is done at a very early stage to ensure that the funding solution we put forward will be one that can take their project to completion. Each line item is reviewed with the client and in the end, a funding table is provided detailing who is responsible for funding each cost making it easy to track payments and project stages.

Choose experience, strong business acumen, and no hurdles. Choose ASAP Finance.

When funding on a cost-to-complete, the most important thing is to have a lender by your side that understands the intricacies of your project and one that prioritises the successful completion of your project. Reach out to ASAP Finance, one of the best development-focused finance companies in Auckland, today.

Written by Ben Friedlander

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