John Paine: June 2007 Finance Newsletter
John Paine: June 2007 Finance
In the March GLOBAL UPDATE I talked about the large amount of money sloshing around the world looking for a home. This has resulted the emergence and abundance of non-bank lenders and sophisticated new finance products.
In the May GLOBAL UPDATE I showed how this has opened up the range of finance available for businesses – and in this issue I’d like to address finance for property development.
Traditionally banks have been the main providers of development funding for residential or commercial building projects and for subdivisions. But these new sources of funds can enable borrowers to avoid the suffocating restrictions banks often impose on this type of lending.
However, while there are more non-bank lenders now active in this area, few if any are able to compete on all levels. Key factors in deciding on the best financier for property development projects include:
- Interest rates and fees - many non-bank lenders now compete with bank rates.
- No early repayment fees – including rebates of fees for early repayment.
- Loan ratio – 100% of cost borrowing is now common.
- Size of the project - different lenders have different limits for any one project, or any one client.
- Speed of response – some financiers can make firm offers without drawn out credit committee or board approval processes.
- Availability of funds – see comments below.
- Pre-sale requirements – banks generally want 100% plus cover, while many non-banks are happy with residual debt.
- Location – some financiers will not lend outside the main centres.
- Choice of valuers and quantity surveyors – banks and some financiers will only accept their own panel valuers.
- Joint venture developments – a financier takes an equity or quasi-equity position with profit share.
- Initial settlement of a property before development finance is finalised – some financiers are pure security lenders who do not insist upon a water tight exit strategy.
- Financing FF&E – most financiers exclude chattels, fixtures, furniture from their development proposal.
- Financing residual stock once the prime financier exits – could be inventory held to avoid pre-sale discounting, or long term hold.
- Flexibility of drawdowns – including QS reports, valuation, invoice.
We can also arrange initial or top up equity for development finance through no financials residential loans at high loan ratios and attractive investment rates. These are ideal for developers, investors, and self employed.
The secret in obtaining the best development finance is finding the right financier, or combination of financiers, to satisfy the specific requirements of that project - including those listed above.
And many loan proposals are successful as a result of who you send a proposal to - rather than the proposal itself.
This is a mixture of some financiers being flush with money at any one time, while others are not, and the different views a lender will take on the location, or the particular security, depending on the spread of their book at that time.
In particular we can
source funding that would suit borrowers who:
- Own or are purchasing land and are awaiting resource consent.
- Have minimal or no current presales.
- Wish to commence commercial developments not fully leased or are currently vacant.
- Have minimal equity.
- Are looking for a joint venture partner.
- Have projects located away from main centres.
- Minimal current income is available.
The key issue with these new lenders is they will endeavour to make the deal work rather than find reasons not to proceed. They will not necessarily decline applications because of one or more detrimental features including no presales, or resource consents, but will rather look at the proposal in its entirety.
So if you or your clients or colleagues are looking for development finance - or finance of any description for that matter - call me anytime on 021 902 004 or reply to this email with your contact details.
In the next GLOBAL UPDATE I’ll be looking at innovative finance for property investment.
John Paine B.Sc. Dip BIA Global Pacific Corporation Limited P O Box 3229,
Auckland, New Zealand
Please note that all opinions and statements expressed in this newsletter are indicative of my opinion only. Global Pacific Corporation Limited issues no invitation to rely on the information contained in this newsletter and intends by this statement to exclude liability for any such opinion and statement.