High(ish) LVR 5 dwellings in Perth - Finance Needed

Discussion in 'Loans & Mortgage Brokers' started by Tom Simpson, 9th May, 2019.

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  1. Tom Simpson

    Tom Simpson Well-Known Member

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    Subiaco
    Hi Team

    I have a friend (not a client) who has attained a property in Perth metro area and is looking to develop 5 dwellings. He's already placed the deal with a specialist lender who is very good in the development space but he's coming up short around $250k equity so I'm trying to help him sort it out.

    He purchased the property for $930k so there is a touch over $300k equity in there which is what he's bringing to the deal, he doesn't have any surplus cash to tip in. He can't go via normal commercial routes due to the LVR but also the servicing isn't there, he needs to capitalise the interest.

    $620k existing debt
    $1.85m plus development cost
    $2.47m end debt

    $930k purchase
    $1.85m plus development cost
    $2.78m end value
    89% LVR on cost (valuation in one line)

    $3-3.25m approx. end value
    76-82% of project completed value

    Most lenders won't take into account the end of project uplift from the subdivision etc which is partly where we're struggling.

    Any thoughts on the above figures or lenders that may help? Second mortgages may be handy, do you know any lenders that will do this in this situation?

    Many thanks!
     
  2. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    Hey Tom, it's a pity you friend didn't consider the lending landscape when he purchased the site as it's pretty much an impossible deal.

    With a TDC of almost $2.8 and end values of $3-3.2 this is going to struggle to get past any banks risk appetite

    My only suggestions would be
    1. subdivide it first and get out equity that way. As (s)he has no cash they would need to borrow against the current equity to do all the works and it would cost approx $80k or so. Once they have 5 titles then they could maybe do 5 construction contracts and loans under resi terms. No capitalised interest.
    2. talk to Michael Patino at RAC WA finance. RAC Perth do commercial lending and will look at the deal not run it through a computer which says yes/no. His email is
    [email protected] it would be a lower LVR but it would be a lend on end values so might or might not work. Interest would be capitalised but unlikely that they would lend the GST component of the contract.
     
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  3. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Step 1 in any project to develop is determining what the costs will be and how it will all be funded before committing to any site.

    If that step is skipped I would image any estimates are back of the envelope.

    Plenty of experienced brokers will post on this and in this climate it may be very difficult to get finance. Many lenders will see it as commercial not resi finance and the LVR will be impacted further. Plus fees galore. The capitalised interest is a huge issue too.

    If there is a present dwelling the subdivision plans may impact this so even selling the land with DA / permits may involve GST BUT perhaps the margin scheme can lessen that issue. But there will be a lot of costs to get council approval incl council contributions, town planner costs etc. He likely needs to buddy up in a JV with someone who can fund and maybe even do the build etc. Banks wont want to be committed.
     
    Last edited: 9th May, 2019
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  4. Marty McDonald

    Marty McDonald Mortgage broker Business Member

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    Sydney North Shore and Norther beaches
    Not a deal on face value
     
  5. Tom Simpson

    Tom Simpson Well-Known Member

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    Subiaco
    Yikes. Thanks peeps, yes exactly my thoughts.
     
  6. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

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    You can help solve a servicing problem with presales/debt coverage.

    What you can't solve and is the deal breaker is the LVR/GRV.

    Before we get into that though - am I reading it correctly that the development will cost $2.78 and sales are $3mil?

    Have you factored agent fees, holding costs, subdivision costs, additional costs that come up on all construction projects? Even if all of these are factored into the $1.85mil cost - the ROI is extremely low particularly when you weigh it up against the risks associated with commercial lending and presales.
     
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  7. thatbum

    thatbum Well-Known Member

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    Yeah I wasn't sure from the first post if this was the situation. Seems way to lean to be even worth considering surely?