Lender criteria for development finance
Lenders will look at a number of areas when considering if they will provide finance for a development project.
Experience can play an important role in securing finance, but if you are new to property development that doesn’t mean you won’t be able to secure funding. However, new developers may have to provide additional capital, and may not be able to borrow as much money. Depending on the lender, new developers may also need to appoint an approved and experienced project manager in order to secure suitable finance.
The more equity (deposit/capital) you can provide at the outset of a development project, the more favourably a lender is likely to view your application for development finance. A greater equity stake will reduce the risk of financing the project for the lender, as well as your overall development costs.
The location of a proposed development may play a significant part in securing property development finance. A lender will look particularly at how suited the site is to the development, and also the surrounding area in terms of population.
Part of securing finance is being able to determine the profit potential of your development project. Part of the funding process will involve a feasibility study conducted by the lender’s valuer to determine the profit margin. This step is critical in determining profitability and its acceptance to the lender.
In some cases, very specialised developments, such as for a childcare centre or motel, may attract additional conditions from the lender before finance is approved, simply because these types of developments are very specific. A more general development, such as an apartment block, may be easier to find development finance for.
Below is a high-level overview of our development lending requirements.
Please treat these as a guide only – meeting these criteria does not necessarily guarantee loan approval as we treat each project/proposal on a case by case basis.
- Presales to cover 100% of the development debt.
- 75% of the presales need to be “qualifying” (as defined below). We can submit a loan application and get a loan approval on the assumption that you’ll get presales before you use the loan. Therefore you can use your funds first and have a little extra time to get the presales. NB: This is for debt under $10m. If debt is over $10m, then 100% of the presales need to be qualifying.
- The loan to value ratio to be no more than 60% (based on the completed end value of the development [ex GST]).
- The loan to cost ratio to be no more than 75% (cost being defined as the entire project cost i.e. purchase of land, consents, construction, interest, professional fees, etc).
- Return (profit) on cost: at least 20% of the total project cost.
All the above figures should be worked on an exGST basis given you will be claiming/paying back GST on the development.
Below is content on the LVR ratios for Developers, (This is a guide only)
LVR’s are generally applied as follows:
Standard commercial property 65%
Residential Investment property 65%
Accommodation as a hotel / motel 55%
Student accommodation 50%
Serviced apartments 50%
Standard apartment 65%
Nonstandard apartment 50%
7 or more dwellings on one title 60%
As Century21 Financial we want see your success, but we can also connect you with any parties who might be interested in purchasing the property as a development site.
Please note that getting development funding approved can take quite a lot of time. Therefore if it’s likely that you’ll go ahead with the development, it’s best to present us with a funding proposal/business case as early as possible.