Finance for Five X Townhouse Development

Hi guys,

I was wondering if there are any lenders that would look into a residential development loan for 5 townhouses at 80%-90% LVR? Permits have been issued in S/E Victoria and now looking if we can build the project or not.

and what is the difference in looking into a commercial loan for the development, could a LVR of 80% be achieved?

What would be the best strategy to finance be?

 

You have resi finance and then commercial finance. It always best to do these smaller development under resi as commercial is overkill. Its expensive and there are conditions you need to meet (builder profile, sponsor profile, presales, etc).

Having said that RAMS is the only lender that will do 5 units under resi finance and they do it on a case by case basis max 70%.

With any development you will need to ensure that you have plenty of funds in the tank so the project doesn't stop half way if you encounter issues or if the project is delayed.

 

I'm led to believe that NAB now do up to 6 units on resi. 80% of total cost. Servicing they will use end development valuation rents. Which if your development is high yielding and you have a little spare servicing may be enough.

 

I'm kind of surprised that you have gone to all this effort and only now looked at financing? Was the original intention to just sell it with permits/DA?

Anyway. I don't know of any banks that will do even 2 or 3 at those LVRs. But I am not a broker so don't listen to me.

IF however you can't find a way to finance it and you still do. You might be able to talk to council about doing a staged development, where you build 2 or 3 under normal resi finance then when they are completed you build the remaining townhouses. Builders, Councils and Banks don't like this route but it might just be an option

Whoa! for reals? I've not heard that one. That would be mind blowingly awesome

 

Thanks for the info Rolf, when you say do the subdivision does that mean this could be also completed under resi finance?

Could anyone confirm this? This seems excessive with the current tightening.

Thanks Shahin, so theres no lender or 2nd/3rd tier lenders out there for an 80lvr? Rams at best?

 

Hi Westminster, that was initially the plan. Since we have held onto it, it seems to be now rewardingly feasibly to explore developing. Thats if everything stacks up in terms of finance. The issue here is the capital needed to keep the lenders happy.

 

You would be very lucky to even get 5 with RAMS @ 70%. Your application would need to be incredibly strong, i.e. strong servicing, excellent A and L position, limited unsecured liabilities, cat 1 securities, dual income, etc.

NAB do max 3 units on single title. 6 is commercial with NAB.

You would most likely be looking at commercial lending and I will be honest it will be like getting a frontal lobotomy.

 

Hi there -

I don't think that is right, unfortunately.

Cheers Ivan

 

I would say that it's not that bad @Shahin_Afarin. For example a local broker got one of my clients a Westpac commercial deal for 6 apartments with no presales for a rate of 5.33% and $8k establishment fee for a 65% LVR on end value

 

That's fantastic but:

1. What about the valuation fee?
2. What about the QS Fee and QS requirements?
3. What do you do when the QS gets half way and doesn't agree with the amount of work the builder as done?
4. You say no presales and thats possible but you need to show that you can service the debt without the use of proposed rental income. Some can show this but most people are mere mortals and can't.
5. What do you do when construction has dragged on and you have hit your term and the lender calls the loan in?
6. I assume you have development experience but what if you don't - I doubt the lender is going to give favourable conditions to a starter.

All of these are very realistic outcomes which people don't appreciate until they encounter it.

I have done my 5 unit development (and have credit ok for 6 as well) under resi with no establishment, 4.30%, no presales, no QS requirements, and no valuation fee but I'm not going to advertise that most people can do this because it was extremely difficult to get across the line.

 

I am doing 4 units on 2 neighbouring titles with westpac home loan. No pre sales no commercial requirements. 4.65% (will come down 25bps). 80% LVR. They used rental income for serviceability.

But I have a resume to show them.

My bro works for Nab told me this. But I have development experience so maybe that helps. I haven't tested it yet though so could be wrong.

 

That Westpac deal sounds like 2 on each title so they would be very happy to do that. Or is it 4 on each title so 8 altogether?

Can you get any further info from your Bro? There was a rumour last year the NAB was going to do some better resi development deals but then APRA came along

 

Yes 2 on each so not a stretch for them.

I will ask him tomorrow, but maybe it was pre apra that he has told me about it. They had definitely planned to move to allowing 6 under resi but maybe apra put the ice on this.

 

I asked my broker about finance for construction of 6 units in one development. They make me jump through hoops; then I didn't feel comfortable with the commercial finance. I said stuff y'all.... And used cash to fund the development.

 

when you say 70% Shahin, is that just a given number they may offer or is it generally even lower? 50 to 60% depending on the deal?

As you said from your current 5 dwelling development you got it across the line, was this with RAMS as mentioned above?

Hi Mr. Dobalina, for your 6 dwelling development what hoops did you have to experience which made you go with and all cash development

 

From what I can recall, I had to use one of the commercial builders in the banks list of approved builders. Otherwise my builder had to go through a rigorous process to get qualified. Also, the commercial loan was only available for 3 years, after which it needed to be refinanced or paid back fully. I saw this as a major risk. In hindsight, this risk was completely valid, as since then, APRA and the banks tightening up their lending.

 

You can obtain a Section 173 on the land (subdivision) which will allow Council to release a statement of compliance and separate titles can be registered, which may help with funding as each lot in the development will be its own title with plans.

The S.173 will have an obligation that prior to occupancy all the works be completed usually.

 

Thanks for the info, where was your build? and did you in the end make your required profits

Thanks undercover I'll speak to my surveyor about this. In this case if subdivided into the proposed 5 dwellings this would then be finance in stages under resi. Sounds like a great strategy. Could anyone advise of this?

 

Rather than a S173 agreement, some councils will let you put a restircition on the plan of subdivision that you must build as per planning permit TXXXXXX. The restriction expires on issuance of CofO. This is better IMO as its cheaper and less cumbersome.


Also @Westminster checked with Bro today, and unfortunately whilst this was planned, APRA killed it... now would be commercial only....