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Construction and Development Loans

Construction and Development Loans

Obtaining construction and development finance for specific property developments is a specialist niche activity within the financing arena. Appetite from financiers is very specifically based on each individual scenario and project, however there are three key areas that need to be addressed when seeking finance for these initiatives

Sponsor risk

This refers specifically to the applicants/ borrowers/ developers who are undertaking the project. Depending on the size of the project, lenders are more comfortable dealing with successful operators. As the project size and the finance agreement grows, so does this requirement. New to market developers can obtain finance for development projects, however lending is more restrictive if you don’t have a successful track record

Construction Risk

Here the lenders are focused on the details of the build, specifically the track record and experience of the builders, ensuring that the practical construction doesn’t have any risk areas that aren’t unknown and budgeted for. Ensuring that the value of the construction contract is realistic and has room for contingencies.

Sales and Marketing Risk

As the revenue for these projects is driven by the sale of the overall project or individual sub units, sales and marketing risk is a key aspect that lenders often don’t negotiate on. Depending on the project and the amount of finance required, lenders will almost always require proof of a certain amount of pre sales or committed income. It is not uncommon for residential development projects not to be funded until the applicants can evidence pre sales of 100% of all of the apartments in the development.

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