One of Loans My Way’s favourite types of lending, development funding is a reasonably specialised funding area. There has been a shift away from the ‘develop to sell’ mentality which has dominated this portion of the market, so now we are seeing banks look at retention and switch to a commercial or residential mortgage at the end of the project. Ususally development finance will be short term interest only facilities; the estimated project length plus a buffer. It would average 2-4 years in most instances depending on the size and more importantly the height of the project. The interest is either paid by the client or capitalised into the loan amount.
The most important consideration for the bank is how they will successfully enter and exit the project. The lender may opt for comfort and depending on the strength of the client, request that presales are obtained for a certain percentage of the site before funding the development. For a shopping centre development, the lender may want to see commitment from an anchor tenant as well prior to commencement. Exit conditions from the construction phase of the project could be as simple as a conversion to a term loan or commercial property mortgage. Debts can be extinguished through settlements from pre or post completion sales, though if a project runs overtime a developer may be forced into refinancing with the current or external lender, or fall into penalties with the current lender.
Lending ratios are normally geared off completion value versus hard costs, such as construction costs, government and utility fees, planning and site associated and acquisition costs. The lender takes the lesser of the two. As an example, a lender may offer to fund the lesser of 65% of the completed value or 75% of the hard costs.