Case Study: 16 Lot Resi Subdivision with Builder Put & Call Options for Sales

by | 6 Aug 2021 | Case Study, Property, Property Development, Residential

STAC Capital was engaged by a developer following the issuance of DA to seek development finance for a 16-lot residential subdivision.

The Challenge

As is our standard process, we engaged a trusted valuer immediately, before approaching any lenders. In this instance, the valuer could not support the projected sales prices the developer had used in their feasibility.

This meant that the required Return on Cost hurdle for the project was not met, which would have hampered the ability to obtain development finance.

A key part of our standard process [and very different to most finance brokers] with property developments is that we engage valuers very early in our engagement – and certainly, before we seek indicative terms from lenders, whether bank or non-bank.

We do this for a critical reason – we want to make sure that we know exactly where the goalposts are before we play the game.

Getting indicative terms from a lender on the basis of assumed values, to then have the valuation come in short, easily results in potentially having to re-think the strategy – and one that may not work with that lender. Worse still, when you let a lender order your valuation, although you pay for it, it’s actually not yours – and they don’t have to give you a copy (and many lenders won’t)! Furthermore, the old rule of “you only get one first impression” undoubtedly applies with lenders and valuations – even if there is good reason to argue that the valuer had been excessively conservative or missed vital evidence to support a higher value, once a lender has seen one valuation, they’re highly unlikely to accept a higher one.

Although most banks, non-banks and brokers will tell you “lenders won’t accept a valuation that they haven’t ordered”, in our experience we’ve rarely faced that problem. Sure we’ve had occasional push-back, but when we put up our stance – effectively “if you want to write the deal, you’re going to have to use this valuation” – we could count on one hand the number of times that hasn’t gone our way (and on those rare occasions, we’ve gladly taken the funding from elsewhere!).

How We Helped

Presented with this challenge of the feasibility not stacking up, the client agreed with us that we should put finance on hold and first devise and implement a strategy to ensure the project’s viability.

Working closely with the client over the following months, builders and various sales channels were explored to seek market acceptance of the project and obtain multiple options to sell the lots at the prices required to make the project feasible.

The Outcome

The market indicated that the sales prices required could in fact be achieved, with numerous builders taking Put & Call Options on Lots.

Once we were able to demonstrate market support for the project, we were then able to negotiate a revised Gross Realisation Value with the valuer, which was:

  1. Satisfactory from a project return perspective (Return on Cost);
  2. Satisfactory for funding purposes;
  3. Provided the client with the confidence they needed to proceed with the development.

STAC then needed to negotiate with a Bank that was flexible with pre-sale requirements for a land sub-division.

Particular focus was on the structure of the “Put & Call Option” nature of the sales to home builders, as banks have varying views on these in terms of whether they are counted as a “qualifying pre-sale”. Our pitch to the banks on this included showing the banks who each of the builders were, and why this created an acceptable risk for the project.

STAC Capital was ultimately able to negotiate a low pre-sale requirement while also accepting the Put & Call sales as qualifying pre-sales, thereby allowing the developer to commence the project immediately.