Bonus Update - Finance and Valuations
Summary
Understanding Development Finance – The video covers various financing options, how banks assess loans, and strategies for securing development funding.
What Banks Look for in a Loan Application – Banks assess borrower credibility, project feasibility, financial reports, and risk mitigation strategies before approving finance.
Key Types of Loans – Retail finance, commercial finance, bridging loans, mezzanine finance, and non-recourse loans are discussed with their pros and cons.
Risk Mitigation Strategies for Banks – Banks use pre-sale requirements, loan-to-value ratios (LVR), and developer guarantees to mitigate financial risks.
Developer Cash Flow & Equity Planning – Importance of structuring finances to maintain liquidity, reduce holding costs, and secure pre-sales to maximize returns.
How to Prepare a Strong Loan Application – Developers should present project reports, feasibility studies, risk management plans, and financial projections to impress lenders.
Importance of Development Valuations – How valuations impact loan approvals, how to get favorable valuations, and why project-related site value matters.- Methods of Property Valuation – Different valuation methods including income capitalization, discounted cash flow (DCF), and residual value assessment.
- Strategies to Minimize Holding Costs – Using longer settlement periods, negotiation tactics, and option agreements to reduce upfront costs.
Case Studies on Securing Large-Scale Funding – Insights from real-world projects where finance was arranged with minimal personal equity injection.
Insights Based on Numbers
First Development Project – A developer secured a $4 million loan for a 9-apartment building without prior experience.- Construction Loan Arranged Without Pre-Sales – A 2015 project in Brisbane was fully funded by Westpac without pre-sales, demonstrating strong financing strategies.
- Commercial Loan Repayment Strategy – Loan-to-value ratios (LVR) are generally 60-75% of the project’s gross realization value (GRV).
- Importance of Pre-Sales – Some banks require pre-sales covering at least 50% of the project cost before approving construction loans.
Project Timeline Example – A project took 2.5 years from site acquisition to completion; potential time savings of 6-12 months were identified.- Finance Structuring for Maximum Equity Release – A developer used a contract price inflation strategy to free up an additional $80,000 in equity.
- Bank Risk Assessments – Banks avoid funding developments in areas where they already have high exposure, even if the project is viable.
- Impact of Property Market Conditions on Financing – Loan approvals and terms vary depending on whether the market is hot, stable, or declining.