Boutique Builder-Developer takes biggest step

Success Factors

  • De-risking the project to mitigate the fact this was the biggest project to date for a developer who is also an owner builder (27 units over 5 floors with double basement)
  • Approving a partial build and hold structure where part of the units completed were to be pre-sold and the residual were to be retained by the developer
  • Ensuring the bank understood the strategy around retaining and leasing 14 Affordable Housing Units to be held as residual stock
  • Restructuring the developer’s entire debt portfolio to ensure an adequate securitisation structure and liquidity to complete the project without cash flow concerns

The Situation

Our client is a successful family owned builder-developer company with over 25 years experience. The company has historically focused on building duplex, townhouse and small walk-up unit blocks. Part of the transition from father to son in business continuation saw the son take a more ambitious approach to their growth strategy to explore medium density apartment developments.

The project at Mays Hill Sydney was to be their biggest project to date with 27 units over 5 floors and a double level basement to be developed and built by the client.

 

The Challenges

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

The Results

The Preparation

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
the Consultant team assembled
  • Construction programme & risks
  • The exact position of their A&L
  • Existing banking relationships and other relevant information.
  • 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.

    The Approval

    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.

    WHO TO TALK TO

    Will Li
    Commercial Director
    Tommy Lim
    Managing Director