Development finance is a finance for the construction and sale of commercial property or a commercial development of residential property to be put up for sale. Development finance shares many characteristics with other forms of project finance in that are often different stage-gates. Lender requirements for development finance will heavily depend on the type of development project.
The need to know
- Development finance shares many characteristics with other forms of project finance.
- If developing residential property, e.g., a block of residential units being developed to sell, lenders will often require a certain pre-sales commitment before funding the transaction.
- Some lenders will have specific criteria around the required level of experience of the developer and builder before funding a development project.
Categories of loans
There are multiple types of development finance products available depending on loan need and the development project's stakeholders and characteristics.
| Metric | Bank Finance | Private Lender | Mezzanine Finance | Land Purchase |
|---|---|---|---|---|
| Amount | $500k – 100m+ | $500k – 50m+ | $1 – 15m+ | $500k – 50m+ |
| Max LVR | Lower of 65 – 75% of total cost or 50 – 60% of GRV (excl. GST) | Lower of 75 – 80% of total cost or 65% of GRV (excl. GST) | Up to 90% of costs and 75% of LVR | Lower of 55% - 65% |
| Term | 12 – 36 months | 12 – 24 months | Term on deal-by-deal basis | 12 – 36 months |
| Rates | 5.5 – 8.5% p.a. | 8.5 – 12.0% p.a. | 15.0 – 25.0% p.a. | 5.5 – 12.0% p.a. |
| Fees | 0.5 – 1.0% | 1.50 – 3.95% | 2.0 – 4.0% | 0.5 – 1.0% |
| Key requirements | • Full business financials • Experienced developers • Experienced & financially strong builder • 100%+ debt cover through pre-sales |
• 25 – 50%+ debt coverage through pre-sales •Independent project manager if not experienced developer |
• Priority deed with senior debt • Experienced developers • Experienced & financially strong builder |
• Loan exist strategy • Debt service • Planning status |
Key information requirements
To qualify for development finance the business must have:
- Draft 'project feasibility study' ready
- Background on developer experience
- Completed assets & liabilities statements for directors of the development company
Once the above are established, subsequent requirements include:
- Valuation
- Fixed price building contract
- Quantity surveyor cost report
- Full financials of development business (for bank finance)
Example scenario
Property development
The developer initially engaged the bank whom she had previously dealt with for her development finance needs. The banks took 3 months before telling them her they couldn’t assist. She had many years of experience with a strong project in Sydney metro.
Key transaction terms
- Amount – $4.2m
- Term – 15 months
- Product – Development finance
- Result – Valiant was able to fund 80% of development cost for the client’s Sydney development (65% GRV).
For more information on Connective's partnership with Valiant or Valiant's business loan platform please contact your Broker Support Manager, Valiant BDM, by calling them on 02 9571 0218 or connective@valiant.finance
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