By
The scenario
A Melbourne-based company that specialises in coordinating and project managing property subdivisions referred this couple to me. The couple had purchased a property with a 12-month settlement period, and the referral company had not only sourced the potential development site for the clients but also gone through a planning process and obtained a permit for multiple units, all before the settlement date was due.
Let’s rewind the clock to 12 months earlier, when the clients made the commitment to secure the site. At the time they felt confident that they would secure a loan through their bank; however, given the time it takes to obtain a development approval, the funding process was postponed until closer to settlement, as they assumed it would all fall into place.
When the clients did approach their bank, with which they had all their accounts and lending facilities and a relationship going back many years, they were told it was unable to assist, as the clients could not service the proposed debt.
Naturally, the clients were perplexed, as they had anticipated their bank would fund the deal purely on the backing of the security and their exit strategy, which was to clear the debt through sale of the completed project. Unfortunately, this is a common misconception. Mainstream residential lenders don’t work that way, as they still need to see that the borrower is able to service the overall debt.
There are a few select specialist and commercial lenders that would consider funding the deal on the basis of the proposed exit strategy; however, before they fund the project, they typically require the borrower to obtain presales to demonstrate that a certain percentage of the debt will be cleared on completion of construction.
In this instance, the clients couldn’t even attempt to sell any of the houses off the plan because they had not yet taken ownership of the site. The settlement date was looming, and they had to source the funds and settle, but they were at a loss what to do, considering that the lenders they had approached had given them a resounding ‘no’.
The solution
When I reviewed the project I could see it was well planned and executed, and I was confident I could source funding. The clients were well placed financially, with several income streams from businesses and rental properties. But this was not enough to service the loan they required.
I researched options that would accommodate the project, and it came down to private funding. The challenge was to find funding with flexible terms, along with pricing and fees that did not compromise the bottom line of the project. I contacted a number of private channels and received two positive responses.
The settlement date was looming ... but the clients were at a loss what to do, considering that the lenders they had approached had given them a resounding ‘no’
I presented to my clients an outline of my recommendations, which included using the equity in an unencumbered property they already owned, along with the title of the new site they were purchasing, to fund 100% of the acquisition and ongoing costs and capitalisation of interest until completion.
With this kind of scenario, it was essential that I prepare a sound proposal to provide a prospective funder with a clear understanding and the confidence to back the deal. The research and data I presented not only outlined the client’s personal and professional background but also the project manager’s history, and along with it the feasibility study of the development, the way in which it was going to be executed and finally the exit strategy. This level of preparation, although time-consuming, is absolutely necessary to cement a funder’s confidence. In turn, they presented offers that I could take back to the clients.
We went through every point in detail and engaged in further negotiations, including revision of the funder’s pricing and exit terms. One of the key requirements for the client was that the facility term would not expire mid-construction, so we needed a contingency to extend it at minimal cost if required, and also to exit the funding agreement at minimal cost. It required some sweat in the negotiation process; however, we reached a point where all parties agreed.
The takeaways
The days leading up to settlement were intense as there was still a significant amount of work to be done in coordinating various parties and ensuring that after 12 months the clients could settle on the scheduled date. When it came to fruition there was an enormous sense of relief.
This kind of scenario, although complex, is not uncommon. Seeking the right advice and guidance from the outset can save borrowers a significant amount of time and effort and eliminate some of the stress.
Mary Sartinas
Director, Affiliate
Finance & Property
