Land Subdivision Finance

Hi, I am currently looking at purchasing a site which has a planning permit for 7 lots. This is a 'land' subdivision project, there will be no building. Only services and road access construction related activities.

Looking for some feedback on what the financing options are. I will be speaking to a broker (member on here), but would like to go into the discussions with a bit of base knowledge, so would like to hear peoples opinions.

The site is in a growing rural town in vic, I estimate the total development costs to be 1.15m, the gross realisable value to be around 1.5m. Not massive margins on this project. But it should be relatively low risk as I am a land surveyor, and I will be bringing in my bosses in on this one (ones a land surveyor, the other a civil engineer).

I am thinking the biggest risk for this project is the end sales. Given there are 7 lots that need to be sold, a 20k reduction in price would significantly reduce the end profit. So to overcome this I believe presales will be the best option. Thinking maybe adding a condition in the contract that requires a number of presales before going unconditional. Maybe 2 or 3 to gauge the market and confirm the required margins will be made. Another option is to see if the seller would be interested in a JV.

My finance related query is as there is 7 lots, it will be a commercial loan, so will presales be required anyway? What is the likely deposit % we will be required to provide? Will it be based on a % of TDC or GRV? I am thinking each of us provide 150k each (total 450k), will this suffice? Can this be equity or does it need to be cash? What is the likely lender interest rate? Can it be capitalised?

Will the age of my business partners affect finance, and if equity is to be provided? One is 60, the other is 77.

 

Great, thanks for replying Rolf.

If total cost is 1.15m, we provide 450k, so are left with 700k to finance. So we would require presales on 3-4 lots to cover the 700k, and then a lender may lend? But the banks would probably still not be interested and a private lender would be the only way? What if we had more presales, would a bank lender be interested then?

Thanks for sharing your knowledge.

 

@Rolf Latham - Great thanks Rolf.

As a planning permit has been issued for the subdivision, we could prepare the subdivision plan and put it on the market straight away to get the presales.

Once the presales have been met and finance provided, we can finalise the surveying and engineering/service connections, which is our day jobs. Then following council approvals we can lodge the titles and settle. Ironically, we actually quoted on doing the surveying and civil engineering for this site, but were unsuccessful.

What kind of experience is required for the banks to look favourably towards us? All of us have done developments before, but have not done larger ones that require non residential finance.

 

Hi Rolf, does the age of my bosses provide any issues, mainly worried about what the banks opinion of the 77 year old would be (even though he is a work horse and fit as a fiddle - you should see him hammering in title pegs on a 40 degree day!)

And rates between 5-8% are what I have been factoring in. Which lenders are you favourable towards?

 

Max LVR is 65%.

The matter of presales resolves around servicing - you may not need any presales or you may need 100% debt coverage because the loan doesn't service.

The matter of experience is only necessary with the mainstream lenders/banks but they are somewhat easing up on this depending on the proposal.

Non bank lenders don't have this requirement.

The other important issue is feasibility - whereby some lenders require a minimum profit of 15% and some 20%.

Rates are going to be circa 9% and fees are circa 1.50% of the loan amount.

The age of the directors/sponsors aren't an issue per se as these facilities are 1-2 year facilities and this is why servicing is an issue and this is why the concept of presales rears its head.

You have also mentioned capitalisation - there is a misconception that interest can be capitalised which they can but people don't release this is built into the LVR/GRV.

This sounds like a proposal for La Trobe.

 

I'll take a stab in the dark and say it's this property. It's a Good location.

9 & 11 Michelsen Street, North Bendigo, Vic 3550

I watched the Auction for this. The auction consisted of me and two other parties. All three of us were just there to watch it. I didn't even get the vibe that any of us were considering making offers after the auction.

I'm far to early/young in my journey of investing to take on such a project. But I find it interesting and educational to go look at them.

 

Hi Shahin,

Thanks for your input. The main thing I am getting from yourself and Rolf is it can be done, however, you (and the banks) would like more margin in it. 20%+ is what we will be negotiating for.

When preparing a feasibility, what do the banks want to see? Is there a software that they prefer (ie estate master) or is a spreadsheet ok?

Is there a website or online PDF that you think I could read to enhance my understanding of this area of finance?

You always here successful developers saying developing is a game of finance!

Thanks Shahin.

 

Hi Bendigus,

Its not Bendigo. Although, that one does seem quite similar. I am going to keep the location close to my chest, as its not a big market.

 

The issue isn't feasibility as you are already showing at least 15%.

The issue will be more servicing than anything else.

Re the feasibility - a spreadsheet will suffice. There isn't a template as such but must be detailed and comprehensive.

I have done a finance guide thats available on the forum (not sure how to retrieve though).

Finance isn't particularly hard or complex. It all comes back to the fundamentals (servicing, LVR, etc).

 

Hi Shahin,

Could you please expand on the servicing?

Do you mean as part of the application our salary will be assessed to confirm we can service the loan (like residential lending)?

I thought if we provided the deposit as equity, then that part would require us to personally service as this will be an increase of our residential lending against our PPOR/investment property. But after that, the remaining loan will be commercial and subject to presales etc, and not require us to personally service commercial loan portion, is this correct?

With the timing of payment of loan principal and interest, my understanding was these payments could accrue during the project, and could be paid out at the end of the project when the lots settle.

Thanks for you help, I have read documents you have prepared in the past, perhaps with Bedeveloper? I will have a search and see if I can find it again.

Thanks again.

 

Ok, I have had a bit of a read and I think I get it now, can I summarise below and you tell me if I have it right or not?

- Deposit provided by cash or equity - if provided by equity then this will increase our personal residential loan and will need to service personally
- The Commercial element of the loan can be subject to two different methods:
1. Can be based on each of the partners being able to service the whole commercial element personally, through PAYG, rental, dividends etc, or
2. Can be based on obtaining adequate presales to satisfy the whole of the commercial element of the debt

 

You need to demonstrate that you can service/repay the loan even with a commercial development application.

By having presales then this reduces the end loan balance and hence the term "debt coveage".

Yes the deposit can come by cash or equity but if you are going to bring properties across (not advisable/preferable) then you need to show you can service that portion of the debt as well.

You need to seperate LVR and servicing.

You need to a) maintain a max LVR or 65% on the proposal and b) ability to demonstrate you can service that amount debt.

Note that there are other components to the application but these are the main hurdles to overcome.

The project would be IO but the term of the loan is only 1-2 years.

 

Ok lovely, I get it then i think about it some more and i get confused again. Sorry! And thank you for your patience Shahin.

To clarify, can i use an example with numbers, this will then give relevance (in my eyes) to what the terminology means, especially 'debt coverage'.

Lets say:

GRV is 1.50m
TDC is 1.15m
Site acquisition: 800k
Deposit:450k (from cash to make it easy)
Loan value: 700k
Assume presales of value 800k to cover 100%+ of loan debt.

Loan to Value ratio - Is this Loan Value/GRV (700k/1.5m), so 46%? Or is this Loan Value/TDC (700k/1.15m), so 60%?

Is the servicing requirement calculation for the commercial element nil, as the loan value is 700k, and the presales (of 800K) reduces this loan value to below 0. So the term you used 'debt coverage', in this case reduces the required debt to service to below 0?

Or even with 100%+ presales do we still need to show we can service the 700k loan?

Thanks for clarifying this for me Shahin. It is really appreciated!

 

@lixas4 - you don't have access to the deposits so you can't offset these against the loan.

 

Thanks Scott, and for anyone else reading this and wanting to know more, i found a thread @Shahin_Afarin wrote where he summarised pretty much every question I have had.
Development Finance Guide

 

How have considered ownership structure and how it will impact on serviceability?

 

Hi Terry, not yet. I have been emailing Michael A., and once I know more about whether this will go ahead, I will have a consultation. This may then lead to discussions with yourself?

Do you see any potential issues?

 

Hi Lixas,

In the above scenario you dont need to show servicing if you have $800,000 in presales.

Brokers explain what clients are able to do in terms of structure and proposal.

Brokers don't pick sites but should work with the clients explaining finance terms, structuring, feasibility, presales, product type (units vs townhouses vs land releases), etc.

Also Scott mentioned you don't have access to the deposits but you can always negotiate as part of the contract that the agent/purchaser allows for the deposit to be released to you. A purchaser's solicitor will most likely reject this but have seen this work in some instances.