The short answer is no, you do not.
By structuring projects as partial build-to-sell and partial build’n’hold, we have successfully banked transactions with presales as low as 35% of total loan size. However, this is dependent on the nature of the project in terms of rental return, profitability margins as well as the financial strength of the developer/sponsor.
The general rule of thumb is that the project return (Profit/Total cost) should be no less than 25% and return on equity (Profit/Equity Invested) should be no less than 60%.
Having said that, we have banked transactions with lower returns than this if other parts of the transaction showed exceptional strength. The best way to answer this question is to get in touch with us and we will be able to give you a fairly good indication on whether the profit margin is acceptable.
You are not alone in this situation. During tough financing conditions such as what we are experiencing currently, banks’ risk appetite has tightened significantly and one of the first to be targeted are owner builders.
The reason for this is due to a perceived conflict of interest and less diversification in financial strength (2 balance sheet vs 1). However, owner developers are still bankable as we demonstrated recently with a client. From our experience, as an owner builder, your margin for error when it comes to financing is significantly smaller compared to a pure developer, so it is very important to do your prep work before you speak to the bank so you can put your best foot forward.
Refer to the Case Studies section on this client (right click to enter).
This unfortunately is one of the areas where the banks tend to give very little flexibility.
The reason for this is the builder is tasked with the delivery of the build and is the most critical and riskiest part of the project from a bank’s perspective. If the bank has deemed a particular builder unacceptable, it will be quite difficult to change that decision so your best course of action may be to look for a different lender. Our advice is to run a shortlist of potential builders past the bank before you make a final decision on the construction contract, because while a particular builder may be cheaper, it won’t do you a whole lot of good if he/she is not bankable.
We generally do not recommend cross-collateralising assets outside of the project to form part of the security pool. The reason is because there is inherently quite a lot of risks in the delivery phase of the property development cycle.
Should something go wrong, it would be quite difficult to see what could be years of work go down the drain with your development; however it would be much much worse if your home and other properties were all tied up with it and you literally ended up with nothing. The banks will tell you that this is the only way for them to lend you the money; this is not true. We can restructure your finance and inject required equity without tying all your assets with the project together, please make sure you speak to us before committing all your assets to a project as security.
This is a tricky question to answer. Start too late and you face delay and associated costs if the banks are slow to approve your loan; start too early before you are ready and the bank may decline your application before they fully appreciate the strength of your project.
Our general recommendation is to start preparing to approach the bank after you have the following in place:
SF Capital’s approach is to present a fully packaged deal to the bank which addresses their credit requirements upfront. Our experience tells us that’s when you will get the best bankers and when the credit team will be most engaged which will give you the best chance of securing a competitive financing solution.
Generally speaking, if you can bank the project with a Tier-1 lender (Big 4, St George, ING), the rate should be between 5.50 – 6.5% depending on the risk profile of the transaction and the bank. Upfront establishment fee is generally between 0.5 – 1%.
If you’re unable to bank with one of the above banks, then you are in for a big jump in interest rate with the likes of La Trobe at around 10% and a 1.5% establishment fee.
The next round would be private lenders with the likes of Qualitas, White & Partner, Metric Credit Partners where the all in rate will be somewhere around 11-13% and establishment fee can be upwards of 3%.
At SF Capital, we take on a role more akin to a Financial Advisor (traditionally played by the investment banks to major corporates) than a simple broker.
We will live and breathe the project with you:
And we do all this alongside you as your trusted advisor and your partner. You will always be informed on what we are doing and we will always let you know the reason why we do things.