These days there are many requirements for a developer before they can get their project out of the ground, and it's important to understand how they all tie in together to ensure a successful outcome.

Obviously there is the development approval process and all the associated issues, particularly if it’s outside the planning code, then detailed town-planning submissions and consultants reports will be needed. However, with the support of good consultants this process can usually be navigated with confidence and give you the right outcome and one that a valuer will support, allowing you to turn to the next set of hurdles. 

Regardless of a need to achieve pre-sales to meet your lenders requirements or not, a sales and marketing campaign is critical to your projects success and time is never your friend unless you are developing in a perfect market, which is rare. Banks will more often than not, require you to have pre-sale cover equating to 100%+ of the total debt before providing the finance you require, and many other lenders will require some sales to support the market acceptance of your product, and help justify your gross realisation projections, which ultimately get validated by an independent valuation. There are specialist construction lenders who will fund projects without the need for presales, but an argument still needs to be created as to how and why the project will attract buyers during construction period or shortly after.

Last year South East Queensland experienced strong local, interstate and overseas investor demand for residential property especially off-the plan and contracts were plentiful. However, state and federal elections, tightening bank regulations and increasing negative press meant local investors retreated and developers targeted more overseas sales to fill the gap. 

Most lenders traditionally accept 15% to 30% FIRB pre-sales but have settlement risk concerns and require comfort around the buyer credentials and ability to obtain finance. While some will accept higher levels, if your FIRB pre-sales exceed 50% it presents a challenge with most seeing it as too high a risk and passing. While local banks have not totally closed the doors to overseas buyers, they have reduced lending ratios to 50 to 60% of on-completion valuation, which may impact settlements. 

So, having secured your pre-sales, your lender needs confirmation of the “as is” site value and “on-completion” values of the finished product to ensure their security position is what they think it is. Paying too much for a site will affect your profitability but so too will over estimating the end values and presales don’t guarantee the outcome. If the valuer assesses buyers have overpaid due to over enthusiastic selling or uninformed buyers or you have over paid for the site chances are he will amend the site value accordingly resulting in your lender reducing their loan limits accordingly. A lender’s risk officers are usually unwilling to accept return on cost of less than 20% without some significant mitigants.  

As you can probably see, there is a common thread in all of these steps. They are all connected to the approval of your construction funding both in terms of their outcome but also the timing.

Your next challenge is to secure a suitable builder and too many novice developers opt for the best price rather than worrying about the builder’s ability to deliver. If your builder can’t deliver a finished project on time and within budget there is a real risk that you will end up footing the bill for the difference so do your homework and make sure he has the capability and experience you need. 

The timing of locking in your builder is a key part of the process. Relying on a quote you got six months ago to run your modelling could see your assumptions significantly impacted by changes out of their control such as the availability of trades, cost or availability of materials and union activity.  It pays to lock in a build contract and assure it is a fixed price and term as soon a possible but not before you have all your other ducks such as the finance locked up. Its also important is to ensure the building contract you sign is not one-way traffic.  The right legal advice and having a Quantity Surveyor check the numbers are imperative. 

Engaging a QS early in the process can save you real dollars and by choosing one acceptable to your lender you can often save costs because they will accept his report on the cost to build for their own purposes. A fundamental part of his brief should be to confirm that all the relevant factors such as insurances, soil tests, site history and other factors that could influence the project have been satisfactorily dealt with giving you and the lender comfort.

Market conditions are constantly changing and lender requirements shift accordingly so it pays to be thinking about how you are going to fund your project from the get go and plan your strategies accordingly. It also pays to engage a professional to help navigate your project through the maze of the various lender requirements to ensure you get the option that best suits your financial and strategic needs and avoid hurdles you weren’t prepared for.

This article was written by Dan Holden of HoldenCAPITAL, a bespoke construction finance firm. HoldenCAPITAL arranges construction finance and invests in projects through their equity trust, Queen Street INVEST. To discuss your project finance requirement please call (07) 3171 4200 or visit www.holdencapital.com.au.

Read more from Dan Holden of HoldenCAPITAL:

New HoldenCAPITAL report describes non-bank funding landscape

Diversify your risk by partnering as a passive investor

When does sweat equity via uplift in land value count?

Why the banks fear foreign pre-sales

Risk & reward: Does more debt solve your problems or do you need a JV partner?

Don't forget your GST obligations when arranging your project finance

Why the bank won't let you have a second mortgage