The Challenge
The developer’s capital was tied up in another project, impeding their ability to get into another project in the short- to medium-term. Actively looking at sites where he could engineer equity, through uplift by obtaining favourable terms – but with such a hot market for development sites, vendors are increasingly aware of their negotiating strength, making it very difficult to acquire sites on terms that allow for extended DD and for DA to be achieved prior to settlement.
Our Approach
Discussing the issues and what they wanted to achieve, we explained that the current capital market is very liquid, with certain lenders having a capacity for equity-style investments, over and above typical mezzanine limits for high-quality transactions & sponsors.
This included capacity for sites where DA had to be amended and where there would be a period between settlement and commencement of construction
This discussion allowed the developer to broaden his search and look at properties he previously would not have been able to acquire due to his equity constraints.
The Solution
Shortly after this discussion, they identified and contracted a medium-sized site with only a 30-day due diligence (DD) period. During this DD period, we were able to source two offers for close to 100% funding, including significant pre-construction costs (i.e. PM fees, consultants, presale commissions, stamp duty) and that allowed the client to amend the DA. This funding was sufficient to bring the project to a point where the senior funder would fund the remainder of construction funding.
This provided the confidence to the client to satisfy his DD and proceed to settlement.
The Outcome
During this period we negotiated and analysed both offers, outlined the pro and cons of each and provide a detailed comparison on how each affected him, including his profits and ROE under different scenarios. We also started to liaise with senior lenders to obtain terms on both the acquisition and construction loans.
Throughout this process, we managed the relationship between the senior and junior lenders, noting the extremely limited amount of sponsor cash equity in the project.
After a comprehensive process, the lenders formally signed off and documented the facilities. The result was a funding package that will enable the delivery of the project with a Gross Realisation Value of c.$30m and was:
- Well more than the purchase price at settlement and prior to construction.
- Total Loan to Cost Ratio (LCR or LTC) of 99.5%
- Nil profit share from the junior funder, maximising the developer’s returns in a rising market
- Weighted interest cost of both junior and senior lenders calculated at 13% of drawn funds
- Nil presales at the settlement of land
- Nil presale requirement for senior construction debt
If you would like to discuss this case study or learn more about our funding solutions, please contact us.
