Boutique Builder-Developer takes biggest step

There were a number of critical issues that needed to be solved before financing of this particular project could be secured:

• The client is an owner-builder developer which is not viewed favourably by most lenders due to issues of reduced balance sheet strength and possible conflict of interest
• This was the client’s largest project to date – a 5 level double basement unit block.  The previous biggest development was a 9-unit 3-level walk up with single level basement. So from a technical point of view, this would be a big step up to the client as a developer but most critically as a builder.

• 14 of the 27 units were Affordable Housing units to be retained by the developer at completion. Affordable Housing Units are not well understood by most lenders and due to the reduced market for these units, some lenders are not willing to take these as security
• Presale volume was 62% of debt coverage. In today’s banking environment, most banks require 100% debt coverage on net presales.
• The client’s existing debt obligations included cross collateralisation and General Security Agreements covering assets which needed to be freed & leveraged to provide cash flow and equity injection into the project

First things first, we ran the project through our in-house feasibility and financing models and determined that the project would be very profitable if we could get the structure and financing right.

With that box ticked, we sat down with the client to make sure we understood all facets of the project including:

• DA conditions
• Valuation Methodology
• Experience of

Once we were comfortable that we knew as much about the project as the developer himself, it was time to structure the deal to address the key concerns which we knew the bank would have and put our best foot forward.

Our expectation was this was a tough deal to present to the banks, in fact, 3 out of the 4 majors basically laughed at us when we pitched the deal to them. Not to be deterred, we approached the last bank knowing we had a bankable deal that made commercial sense.

We started getting traction after being put in touch with an ex-institutional banker who could see the merit in our project and structure. After months of back and forth and various frustrating calls with bankers and credit analysts, we finally reached a deal with the bank that satisfied both the client’s requirements and the bank’s credit policies.

The finalised loan terms included:

• GRV: $15.5m
• Senior Debt: $7.8m (56% LVR)
• Presale achieved: $5.5m (62% Presale-Debt Coverage)
• Lender: Tier 1 Major Australian Bank
• Interest Rate: ~6%
• Establishment fee: 1%

We managed to mitigate most of the risks that prevented this deal from being bankable with a major tier 1 bank:

• Structuring a partial build and hold strategy to meet the shortfall in presale requirements
• Restructure and leverage existing assets to meet the lower LVR threshold (non cross collateralised)
• Engaged the most experienced Affordable Housing Unit manager in NSW to pre-lease units prior to completion
• De-risk construction programme by
  • employing an experienced full time Construction Manager and adding in an advisory board to oversee the project
  • Utilise equity funding to reach transfer slab prior to bank funding

People laughed at us and told us “good luck” when we told them we are going to get this deal done. We bank the unbankables.