Typical Construction Finance Costs

Discussion in 'Development' started by Kship, 14th Sep, 2021.

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  1. Kship

    Kship Member

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    Hey all, first time poster and developer here.

    I'm wondering if anyone here can verify if these costs to finance construction are fairly standard or err on the side of expensive.

    We're looking to borrow approx $1.6M at 70% LVR over a 12 month period.

    With our current broker, finance charges and legal are $40k with interest running to $121k, to a total of $161k.

    We're on the brink of purchasing a site but need to ensure we clear the lending requirements to build and it's not easy to do so with these lending costs.

    Would really appreciate anyone who has can provide some insight in this area.

    Cheers,
    B
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    You should give more details as if a duplex it would be vastly different to a set out 10 townhouses. At that price it it is more likely to be a duplex or 2 houses so on residential it might be $1000 or less in fees and interest of $60k.

    But I take it you have some unusual issues.
     
  3. Kship

    Kship Member

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    Hi Terry,

    Thanks for the quick reply. Yes, it's a duplex. No unusual issues, very straightforward and likely to be at least one or both pre-sold.

    We're attempting to source funding through a new startup that specialises in brokerage for non-bank lenders into the development space.

    Interesting to hear you feel finance costs should be a lot less. Around $60k!

    If you don't mind I'd love to hear where you feel finance could be sourced at around this kind of level.

    Cheers,
    B
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    most lenders would treat this as a normal construction loan with minimal fees and rates around 3%
     
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  5. Kship

    Kship Member

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    Thanks Terry, appreciate the response. Perhaps my initial wording wasn't clear - it's a commercial/development loan to enable construction, not a residential construction loan. We are financing the site purchase with a standard investment property loan but I believe we'll need to move to a commercial loan, which as I understand takes the overall project feasibility and margin into account.

    Do you still feel it's expensive?
     
  6. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    why is that?
     
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  7. Car tart

    Car tart Well-Known Member

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    So it’s a 2nd mortgage over construction on a property that already has a mortgage on the land. This is mezzanine finance. Very expensive. About 14% pa. Grollo Constructions recently paid 28%
    PA on such a deal.
    Normally you take an expanding line of credit over the land that increases as you build. So you have only one loan and one mortgage. These come in at about 10%pa for development.
     
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  8. samiam

    samiam Well-Known Member

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    This - I need to learn more. Sorry to hijack the thread.
    So is it better to pay out down the mortgage before develops? Then tax benefit of holding cost will be less?
    Also same high interest rates applies when you knock down the (mortgaged) old house? Thanks
     
  9. Scott No Mates

    Scott No Mates Well-Known Member

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    It's not a tax benefit, it's a cost.
     
  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    If you had a loan of $100 and $100 cash you could either use the cash to develop and keep the loan, or pay down the loan and reborrow $100. Its pretty much the same thing, unless you are going to refinance.
     
  11. Westminster

    Westminster Tigress at Tiger Developments Business Member

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    I don't see why you would need to go for a commercial loan. In my experience it is best to find a residential lender who will loan on the site and on the construction. As you are only building 2 this is very common for many banks to do. They will shave some of the end value but you'll get a higher LVR so it may end up being the same amount they will lend.
    Many of the brokers on this forum would be able to give you a second opinion on this. I think your current broker has over complicated what is essentially a very normal and simple project
     
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  12. Lindsay_W

    Lindsay_W Well-Known Member

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    Unless there's something odd about this that hasn't been explained here then this can be done much cheaper and easier via standard resi construction, done quite a few duplex builds like this, most brokers will just charge you the clawback fee upfront as the intent is to sell and pay out the debt within a year or 2
    If you go direct to bank and tell them "we're going to sell the properties at the end of construction" they will treat it as commercial, it needs to be presented in the correct manner, by a broker that isn't going to rip you off on fees.
     
  13. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    yes something is 'fishy'.
     
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  14. Lindsay_W

    Lindsay_W Well-Known Member

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    No need to pay down out the mortgage before doing this, there is no 2nd mortgage required, no Line of Credit required, nor the high rates cartart quoted, for this kind of small, simple, resi development.
     
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  15. Car tart

    Car tart Well-Known Member

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    I think we can only work on the information we have been given. I was explaining why the high interest rates in the current case. At this stage there is no clarity in whether it is a residential duplex or a commercial duplex or why the existing loan on land has to remain. Why they are seeking a second mortgage or mezzanine finance. Whether they are building on land that they own or if someone else owns the land they wish to build on. One would assume it is not a simple matter if the client has gone to complex strategy lenders. As these type of lenders are not easy to find compared to the thousands of standard mortgage brokers that are readily available. This is surely not as clear cut as “borrow the money at 2.x% from a broker” otherwise we are all being trolled
     
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  16. Car tart

    Car tart Well-Known Member

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    The information I gave is for a much more complex development where banks and brokers will not get involved. Best to ask your question on a new thread.
     
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  17. Redom

    Redom Mortgage Broker Business Plus Member

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    Dev funding usually goes to a few different streams:

    1. Resi funding - normal resi products. This is great, cheap, simple, easy to access. Many developers don't qualify for this for a myriad of reasons. This can also be in the low doc space, but your loan size can make that a bit trickier to access resi low doc construction funding. Its generally time consuming to get complex projects funded here (triplex/quadplex funding generally takes 6-8 weeks to get it all done best case, with long form vals, credit team questions, more approval layers, etc) but duplexes are really close to as simple as it gets and there's a large number of funders available which help bring some speed to it (choice).

    2. Commercial funding via banks/mainstreams - usually for bigger projects, unlikely to be useful for this type of project/loan size.

    3. Privates/non banks - fast flexible funding, but at much higher costs. This space is deep, there's a whole range of funding out there and a very large number of players. You can get 1st mortgage constructions (likely at higher loan amounts), second mortgage funding, mezzanine, etc etc. Its really just a commercial arrangement. There are some more reputable and bigger players in this space. Latrobe previously dominated this space, but there's been a lot more competition here recently.

    Overall where you fit would depend on the deal, your 'character', the structure of purchase, the number of dwellings, your serviceability, etc. We generally aim to get resi funding for developments where possible, but in some cases, its just much faster to avoid banks altogether and get the privates on board. It may cost more, but on some project sizes and for some developers, if you can finish the job 2 months earlier, the extra 50-100k in funding costs can be worth it to recycle the capital into other projects.
     
  18. Lindsay_W

    Lindsay_W Well-Known Member

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    Unless that was the first place they tried because they thought that have to use those types of funders, people do these things when it's their first or they are inexperienced, I get your point though.
    I'm going off the fact they said duplex, and their about to purchase a site, no mention of 2nd mortgage or mez finance, plus the response to samiam who mentions 'old house' so I assumed residential site in my response to that post too.
     
  19. Car tart

    Car tart Well-Known Member

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    I read one loan to buy the land and knock down the house.

    Then in post 3 he says a commercial development loan for construction purposes. This was the loan we don’t understand and we assume is complex.

    But it could be like a lady I was helping in the outback, she was spraying WD40 on her brake disks and I stopped to ask her what she was doing. The noise from the brakes is deafening she said. I said you never put oil on your brake disks as the first few times you brake they won’t work. I turned on her car and she said “hear that noise”. It was a fan belt. So i used the WD40 on the fan belt. Then I asked if I could drive her car to burn off the oil she had sprayed on her brakes.

    So sometimes we think one problem but it’s totally another and I’m not a mechanic just a car tart!
     
  20. Kship

    Kship Member

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    Hey all,

    Brilliant to check back in here and hear your thoughts.

    To answer a few questions, it is a simple, straightforward resi project without any complications. Buy site, subdivide, get planning approval, pre-sell, build then settle.

    Lindsay_W and Car tart et al are correct. It's our first project, and although we're experts in the property marketing space, we're pretty green in many other ares and are relying on our contacts and advisors to get a feel for how it all works.

    I had a very successful broker contact who I've worked with for other finance who has set up a new fintech business specialising in non-bank development finance. Knowing him well, we went to him for financial advice. Being the main focus of his business, he has steered us in this direction, and we made the false assumption that this was they only way to get funding.

    Thanks to this forum and a few other conversations we've reached out to other brokers and now have confidence in being able to secure a residential loan in the high 2-low 3 % range, which has had a a big impact on our feasibilities.

    Not a bad outcome for my first post on here!
     
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