Advice for first commercial finance application

hi

I read all the posts talking about how hard first timers will find it obtaining commercial finance...

I have a meeting coming up seeking commercial finance for a 3 lot subdivision project.

I'd really appreciate any advice and input on what to take and be prepared with.

I have been preparing a brief to give to the bank including:

A short profile on me:
current employment details
details of employment history relevant to property and construction
My history with property including builds and renos
ID

My finances:
Loan details and statements showing clean repayment history
Proof of property ownership
Last group certificate and a few payslips

Project details:
Before and after pics of clearing and earthworks to date
Site location and features
DA consent conditions
Costings for the remainder of the works I am seeking the finance to complete (service connections, foot paths, driveways, council contributions etc) some quotes, some provisional sums

Product details:
Current marketing material for one of the lots that I have just advertised OTP
Pics and survey of the lots
Architect drawings showing various futures uses for the lots (low and medium density developments)
12 months of market history for vacant land in the postcode
Market appraisals for the lots from real estate


Can anyone who has relevant experience tell me if this is on the right track? Is it too much? Not enough?

Thanks

John

 

Good point Rolf. It's a 3 lot residential vacant land subdivision

 

It sounds like a lot. Who are you presenting it to? Why them?

 

Too much info? Not trying to bore anyone to death! Or provide so much info they find a reason not to lend...

I'm meeting with the 'Business Banking Manager' of one of the big 4.

Why them? A developer I know uses them and put in a good word about me and told them to call me. I ran them over the numbers by phone and email. Now catching up with my loan application, requested docs and they said to bring relevant info.

What do you think Tobe?

 

Is the intention to sell or hold the finished units?
There might be better alternatives out there.

 

Intention is to sell one block and keep and further develop the other two.
Banker is talking about no pre sales as I can service the debt comfortably.
It's not a lot of money, but money I haven't been able to get out of residential lending.

I'm all ears if you have any input?

 

Are you sure you need commercial finance? Residential might work and would be a lot more cost effective.

 

What is the project plan?
Bank will want to see a feasibility on the project. They will run there own anyway.
They will want to know peak LVRs.
Are pre-sales planned?
Cost to complete is helpful - how will it be funded?
How will the loan be serviced? I presume you are requesting interest cap? What term? Do you have a building contract in place?

“Business banking manager” I presume either Westpac or CBA. Total loan under $5mil!

I would question your choice to go commercial for a 3x for under $5m. Speaking very generally, the terms offered are not favorable, unless you need interest cap (cannot service) and want/need pre-sales to make it work, in which case the bank is taking on considerable risk.

Blacky

 

Resi > Comm if
- no pre-sales required, can service debt
- <3-4 properties.

 

Firstly, thanks for all the responses.

Now I think I have been getting a bum steer from the broker I have spoken too. He is 3/4 retired and might not be as up to speed with loan products as I need... The money I need is for service connections, footpath, driveways and council contributions. The broker has told me he can't find a resi lending product for this application.

So to sum up a few things it is the subdivision of one vacant residential block into 3 vacant residential lots.
I can comfortably service the full debt on my income (assuming 25yr PI)
I am hoping to keep two lots and sell one if I have the option.
I am hoping to avoid pre sales if I have the option.

As for leveraging - at max I will be at 87.5% of total spend, and 64% of GRV (conservative appraisal) or 70% of GRV net after gst impacts.

Total spend is under $500k.

Should I can this commercial meeting, can the broker I had been using and talk to one of you guys?

Does this sound possible under resi?

 

Don't know anything about commercial finance but doesn't hurt to get a second opinion

 

Assuming you can service the loans, the real problem here is going to be the LVR. 87.5% of the hard costs isn't a great place to start and it's likely to be a problem regardless if being residential or commercial.

Overall it sounds like residential options are viable, but with not much cash being put in the deal it becomes tricky. Ideally you'd want an 80% lend for a multi dwelling development with another 5% to 10% contingency fund for the 'extras' you've mentioned.

I suspect this will also be a problem in the commercial space.

 

Thanks Peter. I can appreciate the lvr issue.

Your 80% multi unit idea... Would that be 80% grv or of costs?

Can you see a way forward for me resi or commercial?

I think perhaps in the past there was an aussie residential construction loan that may have worked but I can't find a solution at the moment.

 

80% of costs. You can often do up to 90% of residential construction, but for multiple units I've never done anything above 80%. I also know that you want a contingency fund as cash in any construction deal (I'm currently building myself).

For commercial construction, you're usually restricted to the lower of 80% of costs or 60%-70% of GRV. You'd need extra security to go above 80% of costs.

 

Do you have a construction contract?

Sounds like you are ‘peice mealing’ the development.

That is doing the subdivision now, to keep 2x vacant blocks later. Which you will then build on later?

What is the current LVR on the block?

If you give us a fuller position of the current status, plan/idea we might be able to give better direction. It’s all a bit vague at present.

I can’t imagine many commercial bankers being overly excited about a $500k loan at 90%Lvr on a resi property subdivision... but maybe business really is slow...

Blacky

 

Thanks again for the input.

Yes Blacky, that's what I am doing. I would keep all the lots and build on them all if I had the money. So plan is three lot subdivision, sell one to recover some funds and then go on to build on the remaining two lots.

I had the meeting with the business banker.

Confirmed that I am in 'no mans land' with a tiny deal, including retaining 2/3rds, so commercial doesn't want it... While there doesn't seem to be residential scope for what I am trying to achieve.

He said he will try and help... Said he tries not to knock back new business no matter how small as you don't know what further business it could lead to through new contacts, referrals etc. I completely relate to that mindset in my field so hopefully he can assist.

so far he has told me to expect interest rates between 5-6%.

Application fee payable on approval, wouldn't quote me yet but warned it won't be pretty considering there is a lot of work for minimal interest collected.

He is suggesting 12 month term... I would prefer longer. He tells me interest rate goes up as the term gets longer.

Can go up to 70% LVR on end value (my application is <65% LVR)

So far he is talking about no presales required as my income can service at fully drawn.

This is all new to me and I welcome input!

Thanks

 

How will you repay the loan in 12 months time?