Build n Hold Strategy For North Shore Developer

Success Factors

  • Convince the bank that Lane Cove is a premium area to hold newly built apartments as investment assets with rental income for years to come
  • Demonstrate that the Developer has a history of holding residual stock as a long term investment strategy rather than an inability to obtain pre-sales
  • Work with bank QS and credit team to make the Builder acceptable to the bank (originally not accepted by the bank)
  • Restructure the developer’s entire debt portfolio to ensure an adequate securitisation structure and liquidity to complete the project without cash flow concerns

The Situation

The client is a boutique North Shore developer who has completed several similar sized projects in the north shore and northern beaches area including Crows Nest, Mosman, Gosford and etc. 
The latest project for the developer is a 40 unit development in Lane Cove next to main transport hubs and local amenities.
Due to the highly attractive location of the development, the rental return is expected to be strong with very minimal vacancy rates so the developer wanted to hold a substantial amount of the units as long term investments rather than selling them.
However, this posed a serious structural problem when it comes to presale-debt coverage requirement of construction financing.

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 had only $5.9m of net presale vs a required senior construction financing of $16.7m, a mere 35% of presale to debt ratio
  • While we were targeting for a senior debt package of $16.7m, there was still a shortfall of $1.7m of funds to complete which we had to release from client’s existing portfolio of assets    
  • The builder while highly qualified and more than experienced enough to complete the job, was experiencing exponential growth. The bank was quite concerned with potentially unsustainable growth and operational issues with such a fast growing company
  • Negotiating commercial and tripartite agreement between the builder, the bank and the developer on behalf of our client to ensure a fair outcome for all parties.

The Preparation

Before we took on the project and the financing task, we ran our own debt-case feasibility based on a “build n hold” investment model rather than a traditional build to sell development model. The result confirmed what our client had modelled and we began the exercise of coming up with a structure that was palatable to the bank and can deliver the desired result to our client.
Our first task was to calculate maximum debt achievable with the bank and ensure that there was sufficient funds to complete the development. With the maximum construction debt of $16.7m, the shortfall turned out to be $1.7m which could be sourced with releasing equity from other assets held by the developer.

The Results

We were able to secure the financing package given the preparation work we did beforehand and it was a relatively smooth process to convince the bank that the debt structure was reasonable and made sense even given the low presale volume.
The biggest hiccup came up when the latest work-in-hand figure was provided by the builder to the bank as part of the due diligence process. The forecasted work-in-hand was over $200m in the coming financial year, an increase of 200% from the previous year. The bank felt the builder had too much work and could not prioritise or focus on the job for our client; they hence requested a change of builder at the 11th hour.
This was obviously not acceptable to the developer and the builder given how much has already gone into the project to date. 
So we had to come up with a mitigant which allowed the builder to be retained. To cut a long and complicated negotiation process short, the bank agreed to accept the builder on the condition that the builder put a $1.1m term deposit with the bank until the project is finished which was accepted by the builder.
The finalised loan terms include:
  • GRV: $35.1m
  • Senior Debt: $16.7m
  • Presale achieved: $5.9m (35% Presale-Debt Coverage)
  • Lender: Tier 1 Major Australian Bank
  • Interest Rate: ~5%
  • Establishment fee: 1%