Tag: loan application
10 Questions From Your Development Funder (Pt. 2)
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.
10 Questions From Your Development Funder (Pt.1)
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.