In this article, we discuss 3 areas of construction finance Melbourne property developers prepare for when applying for property development finance.
Usually finance brokers can offer a wide variety of loan facilities that cover all facets of construction finance. This includes the traditional 70% to 80% of cost funding all the way over to the much more highly leveraged loans and private equity vehicles.
But applying for development finance is not for the faint-hearted because there are a number of priorities that a developer needs to consider to ensure project success and managed expectations.
Gross Realisation Finance
One area is concept of Gross Realisation Finance. Gross Realisation Value (GRV) usually equates to the end-value of the development project. Lenders, and especially private lenders, will look at both the costs of the property deal and its gross realisation. In fact, some lenders will lend only a percentage against the gross realisation. This type of facility is designed to reduce our client’s personal investment into the project.So this is an important consideration when planning to apply for finance.
Throughout the construction project, you will be likely be required to make progress payments at certain stages of development. There are generally six payments to be made:
Initial deposit – 10% of the total contract. Base/slab milestone – 5%. Frame milestone – 20%. Lock up milestone – 30%. Fixing stage – 15%. Agreed completion milestone – 20%.
Your lender will establish a financial schedule of progress payments to accede to. This will also help in identifying all project costs so payments are made after each stage of development has been inspected and verified by a project manager.
You have the ability to save money this way, as interest is only payable on the amount advanced for each milestone payment. This progressive draw-down means you only pay interest on the funds in use during any particular milestone.
Ensuring that a practical progress payment schedule is implemented is key to success.
There are 2 types of documentation required when applying for funding; those including evidence of income, assets and liabilities and so on, and also specific documents relating to the property development itself. This is done so that the provider can ensure that the required valuations can be implemented.
These documents include, but are not limited to: a signed and dated Building Contract, a Progress Payment Schedule, any required Council approvals, Builders Insurance as well as Public Liability Insurance.
Here is a short video to help explain this concept: