Case Study: Townhouses Construction Funding

by | 31 Jul 2022 | Case Study, Property, Property Development, Residential

Overview

Our client, an experienced residential developer, was seeking funding solutions for a luxury townhouse development comprising 39 terrace homes and a recreational hub with a resort pool, BBQ, and outdoor dining precinct.

The Challenge

The biggest challenge currently facing developers is rising construction costs. In this instance, the final negotiated construction cost came above the original feasibility.

With the indicative terms sheets we had already obtained based upon the original feasibility, the increased construction cost caused the required LVR to increase – so a renegotiation would be necessary.

There was an additional complexity with this project as there was already a mezzanine lender on the property who wasn’t really in a position to provide further funding – so we really needed to get the cost increase covered by the senior construction lender.

The Solution

Having earlier pre-empted the rising costs risk and the impact on projects (in terms of both profitability and funding), we had originally negotiated “nil pre-sales” – which would allow the developer to not have to sell down too much of the project (at “yesterday’s prices”) before being able to lock in the construction cost.

Although the developer did want to get a certain number of pre-sales to give themselves adequate risk protection, that decision at least lay with themselves alone.

Not having locked in too many pre-sales before the higher construction cost became evident allowed them to re-align the sales prices of the unsold stock to the elevated new market level.

With STAC having taken proactive control of the valuation from the outset (rather than what many brokers and developers do, which is to leave it to lenders to order it and hope for the best) – allowed us to hold numerous discussions with, and provide evidence too, the valuers, in order to achieve an uplift in the valuation for the developer.

As project stock was sold at varying periods, we were able to obtain valuations for unsold stock based on the most recent sales (on a $/sqm rate basis). This enabled the valuation to be improved, so the RoC (Return on Cost) was maintained at an acceptable level to not adversely impact the Project Related Site Value and Profit – whilst also supporting an increased lending amount.

We then negotiated with the lenders that had previously issued term sheets to increase their maximum lending and enhance their offers. Continuing to push the “no pre-sales” requirement meant the customer could continue to escalate the sale prices to maximise profitability throughout the project.

The Outcome

Neither the developer nor the existing mezzanine/junior lender, had to contribute any further funds to the project, as the entire cost increase was covered by the senior construction funder. The interest rate and fees we negotiated for the client remained at the level expected.

Most importantly, our client has been able to continue to escalate the remaining sales prices to maximise profitability and move on to the next project.

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