Keystone Urban Developments, a Brisbane-based residential developer, approached us to assist them in securing funding to complete a 70-townhouse project in the North Brisbane suburb of Bridgeman Downs.
Overview
Keystone was considering whether to construct the project in one go or over the approved two stages, seeking STAC’s assistance to structure and negotiate debt facilities that would allow them to drive the project forward efficiently while maximising returns.
The Challenge
Considering the total size of the project, we assessed financing the project over 2-stages versus all at once – including the impact on maximum debt, required equity and pre-sales.
Undertaking both stages at once would result in a higher TDC (Total Development Cost) to be funded in the debt facility, which in turn means a greater amount of equity would need to be contributed at the very start of the project.
Ultimately it was agreed that gaining enough pre-sales to meet a bank’s hurdle for the entire project would be excessive. We would therefore seek approval for 2 stages – but with a catch – Keystone wanted the ability to start construction of stage 2, if and when they chose to, subject to meeting an agreed pre-sale hurdle, even if that was prior to settlements of any stage 1 sales.
The Solution
With the leading bank we were in negotiations with, we worked out that we could get stage 1 approved at the local level, whereas the entire project would require escalation to Sydney – which could potentially drag out the approval (and therefore the ability to start construction). The potential downside risk of doing this, however, could be that after starting stage 1, the Sydney credit authority could decline stage 2 funding or provide unfavourable terms – which would therefore force the developer to complete and settle stage 1 before starting stage 2.
Assessing the pros & cons and potential implications of this strategy, the risk was considered acceptable, and the decision was made to secure the funding for stage one with strong pre-sales that were already held.
When it came time to secure stage 2 funding, the project was in a much better position to put forward the proposal to credit, with further pre-sales in hand and the additional comfort of stage 1 construction progressing well.
The Outcome
By seeking funding for stage 1 only in the first instance, we were able to initially secure funding with less equity and a lower pre-sale hurdle, versus seeking funding for the entire project.
While this does create a degree of credit approval risk for stage 2, at STAC we don’t just “flip a coin” on risks like this – we calculate risks based upon our decades of experience and our deep relationships within banks and non-banks. We then have open and honest strategy conversations with our clients to collaboratively agree on what the best option is – for THEM (because what is right for one might not be right for another).
Pre-Sales debt cover – for this project, we were successful in negotiating an 80% debt cover with stage 1. Contrary to common belief, 100% hurdle is not set in stone!
If you would like to discuss this case study or learn more about our funding solutions, please contact us.
