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Traditionally development projects have been funded by banks or other financial institutions using the Total Development Cost (TDC) method of funding. Plainly put the bank would lend a percentage of the actual total costs of the project, up to a maximum of 80%. TDC facilities are generally stringent and require presales to reach the maximum LVR. In the case where a project would cost $10M to develop, funder would lend a maximum of $8M.
GCC GRV Based Lite Doc Development finance does not necessarily mean a product designed for credit impaired borrowers, but refers to Gross Realisable Value (GRV) based First Mortgage facilities as opposed to TDC facilities as offered by banks. This type of funding is typically sourced via non-bank financiers and private lenders. GRV finance is generally less stringent requiring minimum or no presales. GRV finance is based on the End value of the project, on a cost to complete basis. Maximum LVR for this type of facility is 70% of GRV.
Comparison
For example a project to build a residential block of units will cost $7m to build, and will sell for $10m, the following will be the maximum borrowing potential:
Total Development Cost Structure
By Using the TDC method at 80% LVR, the maximum borrowing potential is $5,600,000 (80% of $7m), or a maximum of 80% of Hard Costs.
GRV based Structure
By using the GRV based facility at 70% LVR, the maximum borrowing potential is $7,000,000 (70% of $10m), or up to 100% based on TDC.
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| By using a GRV facility in the above example the property developer is allowed to potentially borrow an additional $1.4M more than the TDC method and depending on the dynamics of the project could potentially borrow 100% of the project costs.
It must be noted here that a GRV facility will only lend to a maximum of 70% of the GRV based on a cost to complete basis, however at land settlement the loan can not exceed
70% of the value of the land ‘as is'. In cases where the property was acquired without the relevant approvals and the property developer put in place the relevant approvals and significantly added value to the land it is possible to borrow 100% of the land and project costs. In other cases where the property developer acquired an approved development site it will mean that he will need to provide at least 30% of the ‘as is' value land value on the assumption that the borrowings do not exceed 70% of GRV the project will be fully funded from there on.
By utilising GRV finance a property developer is generally able to borrow more money on a project and thereby limiting the amount of equity he will be required to commit to a project.
Below is a simple example to see the benefits to the property developer.
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Assumptions
(all figure exclude GST);
Gross Realisable Value:
Land Cost/Value:
Construction Costs:
Total Costs (excl interest and GST):
Construction Period:
GCC TDC Facility Interest Rate:
GCC GRV Facility Interest Rate: |
$13,000,000
$3,000,000
$8,000,000
$10,000,000
12 months
8% pa
11% pa |
Please note that rates and figures used are for illustrative purposes only, any actual transaction will be priced according to the specifics of the project.
Project Structure Comparison
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Traditional
Cost Based facility |
GCC
GRV Based Facility |
| Sales |
$13,000,000 |
$13,000,000 |
| Development Costs |
$10,000,000 |
$10,000,000 |
| Senior Debt |
$8,000,000 |
$9,100,000 |
|
Equity Contribution |
$2,000,000 |
$900,000 |
| Total Interest Expense |
$500,000 |
$650,000 |
| Total Costs |
$10,500,000 |
$10,650,00 |
|
Development Profit |
$2,500,000 |
$2,350,000 |
|
Development Profit % of Costs |
25% |
23.5% |
|
Development Profit % of Equity |
125% |
261% |
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As illustrated in the above example, by using GRV finance the developer reduces profit by $150,000, or development profit is reduced from 25% to 23.5%. However, the developer's development profit as a percentage of the equity contributed more than doubles from 125% to 261%. GRV finance also required the property developer to contribute significantly less equity namely from $2M to $900k.
It is interesting to note, if on the assumption that the property developer had a total of $2,000,000 to contribute as equity, he could choose one of the following:
- He could choose to use the traditional TDC structure and make $2,500,000 profit, as that is all the equity he has available; or
- He could start two identical projects as outlined above using GRV finance and contribute $900,000 each and make $4,700,000 profit, and still have $200,000 equity in his pocket.
The above clearly outlines the benefit to the property developer of freeing up his equity.
Another significant benefit GRV finance provides is a property developer the option of obtaining construction finance with minimum or no presales. This is particularly significant in markets where the property value is growing. In these circumstances the property developer would prefer to sell the units at completion and thereby gain the capital growth on the properties during the construction period.
By using the same example again, but in an environment where property prices have increased by 5% in one year the following would be the outcome.
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Traditional
Cost Based facility
(with presales) |
GCC
GRV Based Facility
(without presales) |
| Sales |
$13,000,000 |
$13,650,000 |
| Development Costs |
$10,000,000 |
$10,000,000 |
| Senior Debt |
$8,000,000 |
$9,100,000 |
|
Equity Contribution |
$2,000,000 |
$900,000 |
| Total Interest Expense |
$500,000 |
$650,000 |
| Total Costs |
$10,500,000 |
$10,650,00 |
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Development Profit |
$2,500,000 |
$3,000,000 |
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Development Profit % of Costs |
25% |
30% |
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Development Profit % of Equity |
125% |
333% |
As illustrated in the above example, by using GRV finance the property developer has increased profit by $500,000, or development profit rises from 25% to 30%. The property developer's development profit as a percentage of the equity he contributed almost triples from 125% to 333%. GCC GRV finance also required the property developer to contribute significantly less equity namely from $2M to $900k.
Another important note about presales is that typically banks will not extend development finance until the required presales are in place. This will mean that the property developer will have to hold and pay interest on the land until the required presales are obtained and confirmed acceptable by the bank. This obviously means extra costs to the developer. GRV finance will allow the property developer to begin construction without presales, and thereby limiting holding costs.
Experienced and financially savvy property developers are interested in GRV finance as it provides the following benefits:
- It gives the property developer the ability to contribute less equity to the project, and thereby increasing his return on investment
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It allows the property developer to use equity elsewhere and effectively diversifying risk
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It allows the property developer to continue with the project on a ‘stand alone' basis
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It is less stringent and more flexible than traditional development finance
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Minimum or no presale requirement could greatly increase the profitability of the project
GRV finance proves that cheapest is not always the best option for property developers.
If you are interested in learning more about GRV finance, or would like to know how GRV finance can help finance your property development please contact GCC.
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