Property Finance Principles August 2019
Overview • Key terms in development financing. • Distinguish the differences between debt and equity. • When developers apply for finance and information sought. • Key risks for apartment financiers. • Conditions precedent. • Senior debt structure for apartment financing.
Key terms Term Meaning LVR Loan to Value Ratio Loan/Market value of property TDCR Total Development Cost Ratio Loan/Total Development Cost TDC Total Development Cost Total development costs including finance costs Conditions which must to satisfied before drawing a CP’s Conditions Precedent loan Base Rate Base funding rate – cost of funds for the Bank – typically BBSY Margin The Bank’s margin on the loan – the Bank’s return Line Fee Fee payable on total facility limit – payable when loan not fully drawn Sunset The date when presales must be settled in the sales contract date
Differences between Equity and Debt Senior Debt Equity • Limit drawn down over the term • Long term investment • Interest - Base rate + margin – c 4% • Most expensive • Line Fee – 1% • Return on cost – 15% + • Subject to • LVR – 65% • Return on Equity – 20% + • TDCR – 75% • Higher risk - First in Last out • Presales – 80-100% • Last in First out
When do developers apply for finance • Costs and cashflows have been finalised • Development and planning approvals held • A level of presales have been achieved to demonstrate market acceptance of product • Builder tenders well progressed • Valuation?
Feasibility $000's Net proceeds $22,198 Development Costs Land acquisition or project related site costs $3,678 Construction $12,999 Contingency $650 Professional fees $660 Holding costs $80 Finance costs $616 Total Development Costs $18,683 Project profit $3,515 Proposed debt $14,000 Equity $4,683 LVR 61.61% TDCR 74.93% ROC 18.81% Presales $11,200
Key Risks • Strength of Sponsor – track record • Builder – ability to complete • Location and surrounding amenity • Price point of apartments • Composition of apartments – 1, 2 or 3 bedrooms • $/sqm – rate for apartments • Market conditions – presale/settlement risk
Conditions Precedent • Valuation report – as is and as if complete excluding GST • Equity contribution paid • Construction insurance • Licences and approvals • Acceptable Builder – Fixed Price Building contract • Building Tripartite Agreement • Quantity Surveyor Report – initial and drawdown • Qualifying presales • Unconditional • 10% deposit • Not related party • < 20% to foreign purchasers • Sunset dates – 6 months or 50% construction term
Senior Debt Structure • Interest - Capitalising • Drawdowns - Monthly • Repayment – Full proceeds from sale of lots • Loan term – 6 months past practical completion Security • Mortgage – over property • General Security Interest – over borrower • Guarantee
Questions?
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