I am trying to work out the "value" in the LVR for staged land subdivisions. Once the value is known i can calculate what i can borrow at 65% or similar, and what equity is required. Is there a special formula for staged land subs? Example: i am looking at a site which will have a 3 year settlement period, we will fund the costs to get it ready for construction. So when we settle we will need finance for the land, as well as the construction costs for the first stage. My thoughts were the "value" in the property would be the land value + the GRV of the first stage. We could then borrow 65% of this value for the land and construction. Equity would need to make up any shortfall. Is that correct or is there another formula used? The money will be leant from private funders.
Private lenders are all up to negotiation... BUT it's common for funders to go to 65% of GRV less GST and sales commission or 80% of the hard development costs. The unimproved land value of the additional security with be added into the GRV of the development funding. If it is titled separately there might be a possibility to negotiate different terms on a cash out asset lend of the unimproved land.
Ok, i just reread what you said. My take on it as follows, and please correct me if im wrong. Using the example of my first post above, what you are saying is can get 65% LVR/80%LCR of the GRV of the first stage Plus, 65% LVR of the remaining portion of unimproved land value that isnt used in the first stage. So if the GRV of the first stage is 10m (accounting for gst/sales comms), and the remaining land value of stage 2 onwards is also 10m (made up figures), totalling 20m, then i can borrow 13m to settle the land and fund first stage construction, with any shortfall needing to come from equity or mezzanine?
The unimproved land value of stage 2, not the gross realised value of stage 2. Think of it like this, you're cutting up 10x small lots and 1x large lot. They all have some value, but the 10x smaller lots are worth more in-one-line as they have been fully realised. Speak to a broker that does property development funding, you'll need to get your numbers tight to give comfort to a lender.
Ok, I think i understand but not 100% sure because I think the numbers I used in the previous example were misleading. Below is a made up example with more realistic figures: 250 lots over 5 stages - at 50 lots per stage Land Purchase Price: 10m (40k per lot) Total Costs (exclude land): 40m (160k per lot) Total Costs (incl land): 50m (200k per lot) Total Sales: 62.5m (250k per lot) First stage sales: 12.5m First stage land value: 2m Stages 2-5 land value: 8m Assuming the land purchase settlement and construction occurs 3 years in to allow enough time for planning/engineering/presales. So on the day of settlement we have 100% presales for stage 1 and ready to start construction. The "value" to be used in the calculation of the LVR is: Stage 1 GRV ~~12.5m + Land Value of stages 2 to 5: 8m =20.5m x 65% = 13.325m - so this is the approx. amount of finance that can be received in senior debt. The funding required to settle the land and construction of the first stage will be as follows: Land Purchase: 10m + Costs of first Stage: (50 lots x 160k/lot) = 8m = 18m required funding So the shortfall of 18m - 13.325m = 4.675m So the shortfall of 4.675m is required to be made up of equity or mezzanine or a combination of both. And to complicate it more, the value of the land will presumably go up in the 3 years until settlement, and also due to having a permit and being shovel ready, so the equity required will reduce. To calculate this affect in the increase in land value, i assume every dollar the land value increases will reduce the equity required by 65 cents? So lets say the land value increases from 10m to 15m by the time we settle on the land. Then the increase in value of 5m x 65% will be 3.25m. So we can reduce the equity required for the deal by 3.25m. Are the above assumptions correct? If they aren't, if you could use the figures above to help illustrate what the calculation should be i would be very appreciative.
Commercial construction lending is one of the hardest types of assets to get funding on. You are looking at circa 50% GRV can push it to 60% (but it would need to be an extremely strong application). Without any negotiation you need to have a) presales and b) direct experience. Direct experience will need to shown by the project sponsors so you cannot employ a qualified project manager and rely on their experience. The experience also needs to be specific to land subdivisions so if you have done multi unit projects then this still won't count as experience. There are plenty of other things that the lender will look at such as the experience of the builder - they need to see that the builder has done similar type/scale projects. Re presales - lenders want to see a minimum 10% deposit and won't look at anything lower than this. So if you have a 100% presales with a 5% deposit then this wouldn't be satisfactory.
Thanks as always Shahin. What do you think of the formulas in the example above? Is that how it is calculated?
I will share some information. Shahin is not just a experienced broker in such matters but an accomplished developer with many projects completed alone and with others. Project finance is very very different to traditional residential finance. The presales, deeveloper expereince and a range of matters vastly affect many proposed projects. And even more so at present. Anyone planning a project like this needs to ensure is diligently costed and tax is considered as lenders will expect this and often will even require a QS to advise on the cost projections. And finance (a broker that is developer savvy is recommended) is a critical element. Then you may need a town planner for design and consult for best use of the site and.....a thick skin and sufficient cash for the inevitable "issue". One trap is the lender will generally require you spend your $$$ first before theirs is available. And a deposit on unregistered land wont usually be 10%. Here is some reading concerning tax.
I had a quick look at the numbers and they down look right. So lets look at the first stage - you have purchased the land for $10mil and first stage construction/civil works is $8m. The max the lender is going to go is $5mil on the land purchase and $1.25mil on construction. This is working off 50% GRV on purchase and then sales would be $12.5mil so 50% minus the existing loan of $5mil.
@Richard Taylor @Car tart I believe you two do a lot of staged land sub finance and also develop staged land subs - what are your thoughts? I should also add, the example above is made up and the numbers are used to just help work out the formulas and procedures.
Generally I would lend to 80% of my land valuation only. The difficulty is that bank valuers sometimes come in at 20-30% of the real value. My current development that I own and am subdividing in Box Hill NSW has a valuation of over $9 million based on my experience as a real estate agent. The bank valued the site at $2.2 million. This is why banks charge 3-4% on subdivision loans and alternate lenders charge 9-14%. A bank may lend $1,650,000 and take 6-10 weeks to approve for a business, alternate lenders could lend about $7,200,000+ with approvals in 2-3 days. The difficulty would be trying to borrow such a large amount for the construction as well. Those figures seem extraordinarily high and would be more worthy of an interest free joint venture More so than paying such a large amount of interest for a long period of time, for the first stage.
Hi Kent, I listened to a few of your youtube videos, great stuff. I really liked your syndication episodes, how your break down an information memorandum that has been sent to you by a developer looking for investors, very informative.
