How to finance a development site | CRE Finance

As land prices appear to be moderating, opportunities for development site acquisitions are presenting in both Metro and Regional Areas.

Development sites often present in a wide variety of forms and securing finance to settle on time requires a strategy.

Lender appetites can vary significantly depending on key factors

1. Current use of the land

As an example, financing options are more accessible for an amalgamation of 3 suburban houses total value $10M versus a vacant urban growth land site with same $10M value.

For the house amalgamation site a lender might offer 80% LVR ($8M) @ 3.5% PA over 5 year term vs the vacant land 50% LVR ($5M) @ 7.5% over 1 year term.

Overall project feasibility aside a developer is able to enter the amalgamation site with $2M equity vs the vacant site requiring $5M (excluding stamps and costs).

Typically standard residential or commercial use properties have more options than specialised or development only uses.

2. Environmental considerations

As suburbs evolve, past agricultural, industrial and commercial sites become more attractive as residential and mixed use sites.

Soil contaminants and ecological concerns can cause unaccounted for cost and time delay.

For example it can be expensive to remove contaminated soils from former petrol station sites and challenging to negotiate with councils over native flora and fauna issues.

Lenders and authorities require significant independent review so early expert engagement is absolutely essential.

3. Income

What income is available to be evidenced and linked to the purchase?

Is there current or potential rental income from the subject property, individual or company income available to guarantee the loan.

Funding is available where there is no income however generally requires interest to be capitalised into the loan. Typically, if there is income available, the options are greater and friendlier.

4. Planning permit

Sites with existing planning permits can benefit or detract from the financing process depending on quality of the permit and time remaining to execute and delver what is permitted.

Some lenders will remove the value (if any) attributable to the permit when assessing potential LVR whereas other might view a permit as essential to their appetite.

Traditional Big 4 type lenders apply the ‘development finance policy’ (low LVR / high rate) to permitted sites whereas can selectively apply standard ‘commercial and residential policy’ (high LVR / low rate) to properties where there is no visible planning activity.

Tim Allen - Director

Commercial Real Estate Finance Pty Ltd

0422 043443

tim@crefinance.com.au