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How to finance your property development project?

By Amber Khanna | Property Development Finance

property development finance

How to Finance your Property Development Project?

Property Development Finance is very different from normal retail finance. Watch the videos below, to get a complete understanding of how you can finance your property development project. To begin with you need to understand the three stages of property development finance.

Stage 1 - Land Acquisition

Private Funding / Seed Capital

  • Usually required in the conceptual stage.
  • Covers cost of consultants
  • Everything required to put together DA or Planning Permit Application.
    • Reports
    • Consultants

Land Acquisition

  • Usually a retail loan.
  • Must have an existing house on it.
  • Long term loan.
  • When purchasing just land - lender will only consider if it is part of a full development loan.
    • Lenders do not like land banking loans.
  • Land Sub-Division
    • Lender may require you to first secure the raw land with their own money.

Stage 2 - Construction Loan

  • Interest only & often capitalised.
  • Lender may or may not finance GST costs.
  • Interest is calculated on drawn down amount.

Stage 3 - Retail Loan

  • Develop & Hold
  • Offset Account
  • Line of Credit

Property Development Finance Options

Bridging Loans

  • Used to quickly move on a deal.
    • Typically refinanced after a short-term with another lender.
    • Comes at a higher interest rate
    • Often used to obtain planning permits
    • Comes from a specialised lender willing to take the extra risk.
    • Caveat Financing

Mezzanine Finance

  • Debt Capital that gives the lender the right to convert to an ownership or equity interest in the company if the loan is not paid back in time & in full.
  • Used by developers to secure additional financing for development projects, where there is a shortfall of equity required by the main or senior lender.
  • More expensive - because it's secured by a 2nd mortgage. Since it's 2nd in line i.e. if something happens, 1st mortgage holder (senior lender) gets paid out first and then the second lender gets paid.

Non-Recourse Loan / Debt

  • Secured by collateral, real property, but the borrower is not personally liable.
  • If the borrower defaults, the lender can seize the property pledged as security - but the lender's recovery is limited to that property i.e. the lender cannot come after the borrower even if the collateral does not cover the full defaulted amount.
  • LVR is only 50-60% of Valuation.

Read the getting started guide on property development.


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About the Author

Property Developer | Educator | Entrepreneur Experienced in Development Management, Financial Modelling, Land Acquisiion and Development Finance.

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