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What do you need to know about development finance?
No matter how large or small the project, you’ll likely need property development finance to turn your plans into reality. Development finance is a type of construction loan used to fund commercial and residential development projects such as:
- New builds
- Conversions
- Renovations
- Refurbishments
- Land purchases
However, getting the right finance for your development project isn’t just a time-consuming process. It can often be a challenging and complex ordeal too – particularly if you want to construct a larger-scale development.
That’s because many lenders split development finance into two categories:
- Residential lending – typically for projects with four units or less
- Commercial lending – typically for projects with five units or more
Residential development finance is seen as less risky than commercial, so it tends to have a less arduous approval process.
That’s not to say it’s easy. Far from it. You’ll need to make a solid case for your planned development on top of having your personal financials scrutinised. Your application will need to include a feasibility study detailing the costs of construction versus potential profit, amongst other things.
Commercial lending comes with even more stringent application requirements. On top of the feasibility study, you commonly need:
- Experience in building commercial properties
- Contingency funds
- Presales evidence (can be as high as 60%)
- A sufficient amount of your own capital in the deal
The loan’s security will likely be the completed project. However, no two projects are alike – and different lenders will value the same plans differently. And remember, most lenders don’t like risk. So lenders might reject your application if, say, the project is in the ‘wrong’ postcode or the units are too small. That’s because both these factors can impact the project’s resale value should the lender subsequently take possession.
As you can see, development finance is highly specialised. It’s not just about knowing which lenders to approach. You also need to present your proposal in such a way that it ticks all their boxes. But that’s a hard task when each lender has different requirements.
Want to overcome these obstacles and get the funding you need? Then you need to partner with a broker with significant development finance experience, like Commercial Loans.
What do you need to know about development finance?
No matter how large or small the project, you’ll likely need property development finance to turn your plans into reality. Development finance is a type of construction loan used to fund commercial and residential development projects such as:
- New builds
- Conversions
- Renovations
- Refurbishments
- Land purchases
However, getting the right finance for your development project isn’t just a time-consuming process. It can often be a challenging and complex ordeal too – particularly if you want to construct a larger-scale development.
That’s because many lenders split development finance into two categories:
- Residential lending – typically for projects with four units or less
- Commercial lending – typically for projects with five units or more
Residential development finance is seen as less risky than commercial, so it tends to have a less arduous approval process.
That’s not to say it’s easy. Far from it. You’ll need to make a solid case for your planned development on top of having your personal financials scrutinised. Your application will need to include a feasibility study detailing the costs of construction versus potential profit, amongst other things.
Commercial lending comes with even more stringent application requirements. On top of the feasibility study, you commonly need:
- Experience in building commercial properties
- Contingency funds
- Presales evidence (can be as high as 60%)
- A sufficient amount of your own capital in the deal
The loan’s security will likely be the completed project. However, no two projects are alike – and different lenders will value the same plans differently. And remember, most lenders don’t like risk. So lenders might reject your application if, say, the project is in the ‘wrong’ postcode or the units are too small. That’s because both these factors can impact the project’s resale value should the lender subsequently take possession.
As you can see, development finance is highly specialised. It’s not just about knowing which lenders to approach. You also need to present your proposal in such a way that it ticks all their boxes. But that’s a hard task when each lender has different requirements.
Want to overcome these obstacles and get the funding you need? Then you need to partner with a broker with significant development finance experience, like Commercial Loans.
Testimonials
What do our clients say about their experience?
“My bank said no when I approached them for development finance. Thankfully, Commercial Loans helped get me the funding I needed. Very impressed. They’ll definitely be my first port of call next time around.”
Mark H.
“What more can I say…. Professional, efficient, always looking out for the best interests of the client. Commercial Loans simply get the job done!”
John D.
“I will definitely be coming to Commercial Loans for their expertise again. They succeeded in helping us with a great package, and took care of the whole process from approval to settlement. definitely worth a call if you are looking for finance of any sort.”
Michael D.
How you benefit by working with the development finance experts
You want to kickstart your development project as soon as possible. Time is money, after all. But before you can get the builders in, you need the right finance in place with the rate, terms and conditions that can make your project viable.
Unfortunately, many developers underestimate how difficult accessing funding can be – even when you have a track record of successfully completing similar projects. That’s because lenders have very strict requirements when it comes to development finance. So there are likely to be many obstacles standing in your path, least of all the feasibility study.
Then there’s the problem of how much you can actually borrow in the first place.
The amount you can borrow is known as the loan-to-value ratio (LVR). Typically, the fewer units you want to build, the higher the permitted LVR – though this is often limited to what is known as ‘hard costs’.
Hard costs are the labour and materials you need to build your development and don’t include approval, land clearing, legal or other professional fees (known as soft costs). You also need to show evidence of contingency funds (generally 10-20% of the final loan amount) to cover any hiccups during construction.
As such, many first developers find themselves facing a funding shortfall. And without all the money in place, your project won’t get off the ground.
It’s even more complicated when you want to build a larger project (five dwellings or more). Different lenders have different ways of calculating LVRs. But it will likely be based on a combination of your:
Gross realised value (GVR) – the end value of the project (exclusive of GST)
Total development costs (TDC) – all the hard and soft costs involved with completing a project
Level of pre-sales
As commercial finance experts, we can solve your funding problem. That’s because we can look at your unique situation and know, from our years of experience, which lenders would give you the highest loan amount and most generous terms.
Then we can help you put a solid development finance application together, before negotiating with the lender on rates, terms and conditions. So you get the right result – whether you’re planning on subdividing or building a large apartment complex.
Talk To The Commercial Loans Team Today
Email Address
admin@commercialloans.com.au
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1300 169 200