Development finance issue

I am all set to sign a building contract for my 2 townhouse development but now have a finance issue. Plenty of equity but limited cashflow. Personal ownership, single, no dependants.

I'm hoping our PropertyChat finance gurus can suggest viable options.

Total assets:
PPOR: $825k valuation
Development site land: $1425k purchase price in 2013 (valuation now approx $2000k)
Cash $1350k

Total liabilities
Mortgage: $1900k (cross-collaterized)

Income:
Wages: $169k pa + super
Rent from PPOR (currently living interstate): $2,000/month
Estimate rent from townhouses once developed: $15,000/month

Future costs:
Turnkey building contract $1.9m inc GST
Buffer $100k
Total $2000k

Costs already paid for:
Architect fees
Council permits
Engineering
Soil reports
Energy reports
Holding costs to date
Land taxes

Estimated end value:
2 x townhouses $2.3m each = $4.6m
Rental appraisal approx $1800/week/townhouse.

Holding costs paid for by wages
Current interest rate 4.65%

Issue:
I need about $700k more. I will have plenty of equity in the development but am struggling with cashflow according to my lender (big 4 bank) for a standard residential loan. I am told lending rules have changed substantially in the past 8 months.

 

That is a large total borrowings which lenders won't touch under the NCCP if you cannot demonstrate serviceability. Have you settled on the land and is it in your own name?

 

The lending environment has changed as you were told from your lender. The regulator has really clamped down on investment lending. Meaning at the time you bought the site (2014) it may have been possible to get the funds. In today's environment things will definately be more difficult. You may need to consider seeking the expertise of a broker who can run some numbers and see what other options/lenders are available. It may still be possible with another lender. It is common for some lenders to outright refuse you whilst another is happy to throw the money at you.
Just something to think about.

 

Here is what I recommend you do:

1. Uncross the properties and pull out the equity prior to any construction loans @ 80%.

2. Order a few valuations with different lenders and of course different valuers so see how much equity you can access. At those EMV's you are bound to receive a bid difference in valuations and thus equity.

Servicing is going to be an issue however since you are doing a 2 unit development - most lenders will be able to handle this so you have an abidance of lenders to use. The only thing is that the most generous lender (Liberty) doesn't do construction loans.

Nevertheless speak to a broker and get a few options on the table ASAP.

 

Hi Terry,

I bought the land 2.5 years ago and yes it is settled and in my own name. The median house price has risen 45% over those 2.5 years and I am sure my dilapidated house and land is worth much more than the price I paid (about $1.4m)

Serviceability was fine at the time as the big 4 lender was able to add the negative gearing benefit and my wages (professional low risk occupation). Plan at the time was to build using cash and when I ran out - somewhere towards the end of the build - the bank would loan me more after adding back the rental potential of the townhouses. I am told this is no longer possible.

Do you have any suggestions?

 

Depends which lender you're with. If it's with NAB, they still have one of the generous servicing models for the circumstances, so you'll need to look way outside the box to get this done.

If it's not with NAB, then there are lenders which are able to lend more money in the current environment (like NAB).

If you do refinance, get rid of the cross collaterlisation. From a simple risk management perspective, it's got the potential to really hurt you.

The APRA changes have probably affected the total amount you can borrow by around 30% (of your total lending, not just for this project). You need aggregate borrowings of around $2.7M so your lending capacity has possibly dropped by about $800k. Pretty nasty...

Some ideas to consider:
* Get a pre-sale on one of the townhouses and go the commercial route. Tricky with only 2 houses, but if the equity position is strong it gets the project built and you come out with a property.
* Sell it with the plans and permits to someone with deeper pockets. You still walk away with a decent profit.

 

It's time to enlist a broker. Going straight to your Big4 bank is not always the best in this situation where you need something tailored to your specific serviceability and APRA issues. The answer will either be a bank that does better serviceability calcs or a non APRA bank.
This is a high dollar project and it will be hard to get over the line for many banks simply because of their risk appetite.
Is there any chance you could stage the development? Build one half first sell, then the other half?

 

You are dangerously set up for a development. You need more care than usual with these because of the added risk.

If you cannot service you may be able to move lenders to a more generous one. If that still doesnt work you may bel able to add a spouse to the loan but consider the risks and how to do this in a way to monimise risk.

If that doesnt work there is not much you can do except putting someone else on title and getting them to assist with servicing but there are costs and added risks to do this.

If the was a company or trustee owner then it would have been relatively simpler to get this going.

 

Thanks for the advice.

No spouse. Can't stage the development as the 2 townhouses have common walls and facilities.

My plan was to build 2 rental properties and hold both for short to medium term. Possibly sell one after 12 months to reduce borrowings. If I change plans and sell one off the plan I think that will create new tax complications and a GST liability.

 

You will have a GST liability anyway. If you sell within 5yrs of construction you need to pay GST, it gets less the number of years you've held.

Or did you mean CGT?

 

I would get rid of the x-coll straight away. If your borrowing capacity is so tight, it may be the last chance you get, and going directly to a bank will almost guarantee they'll keep it crossed.

Also, maybe see what you can do with your PPOR loan - a better rate (if it's possible) on that one might give you some marginal help to get closer to your goal as NAB take actual payments and load a buffer rather than treating all external debt @ 7.2ish percent. Also, if you're paying P&I, changing to IO payments will also help.

 

Taking on a 2 townhouse development in Sydney (guessing from those gains) in the current market carries a fair whack of risk!
Have you considered selling whilst it still holds its value and then getting into and developing in a growing market instead is a declining market?

 

Melbourne rather than Sydney. I wouldn't try this in Sydney. I think inner city Melbourne is OK.

 

In some circumstances you don't have to pay GST within 5 years of construction. I think it depends on your individual circumstances.

http://www.bantacs.com.au/booklets/How_Not_To_Be_A_Developer_Booklet.pdf

See page 9 for discussion

 

Yeah definitely better but what is "inner city" exaxtly?
Also what is your development experience?

 

Curious to find out which suburb in Melbourne this townhouses are built in. 2.3 mil is a bit that's more than some landed houses in toorak or Brighton or glen Waverley dev sites

 

have a look at this:
Project Funding | Development Finance Partners
seems they can help you to borrow a lot but need to pay higher rate?

 

From the numbers
Current position
$1,900k loan
$2,825k Security (67%)
require additional $700k which will result in $4,825 'hard' Security (ignores end val)

End position will be $2,600 against $4,825k (54%LVR).

Go commercial, should even be able to cap interest for the duration of construction.

Some hurdles but shouldn't be a huge challenge if the details above are accurate.
Only issue may be the fact it is in personal name - but even this can be overcome.

The above is not advice, and completely ignores any risk you may be entering into. Funding should be possible.

Blacky

 

Servicing is the top issues with most investors in this new lending environment..PRESUMING you have reached your servicing limit with all the normal 57 banks in Aus ....for development you can consider private or commercial loan where servicing requirement is more flexible ( and not required in some instances)

Def more costly, but given it's development it's short term...you have to calculate the fine balance between Profit with a higher cost for 12-18 month VS not doing anything...

 

I have had issues with private funders not wanting to do deals if the land is owned in personal names. The logic being if in personal names it is caught by the NCCP (credit consumer protection) rules.