Commercial Real Estate Finance in NZ
Developing real estate can be one of the most profitable projects you can ever undertake. But for people new to the industry, the path from zero to profitability can be a long and treacherous journey. In this article, however, we are going to explain a few things about the industry and getting property development financing for your project.
Finance for property development projects
Funding for redevelopment projects is usually calculated by estimating the increased value of the development and then borrowing against that forecast. Funding can be released in various ways including as staged payments over time or on completion of pre-agreed stages in the project. An individual may obtain finance for a proportion of the loan to value however this will depend on the details of the project, the developer’s experience, the location and the nature of the project. This article will provide details on the different options available to financing property development projects.
So any prospective developer must be fully prepared before any approach is made to lenders for the required finance for any development project. These preparations have to include all the necessary documentation relating to the property that is to be developed, a complete business plan, which can demonstrate the ability of the developer to carry out the project and to be able to manage the debt that is being undertaken. The developer must ensure that these documents are prepared well in advance, properly reviewed and deal with any possible objections. Getting help from commercial finance brokers can help to create the necessary documentation, as they are people who will be well versed with what financiers and lenders ask for.
How much can you borrow to finance your development project?
If you are like most people, you would need a mortgage to buy the property you want to develop. How much you can actually borrow really depends on how much money you have in deposit and your income.
If you do not have other people who can apply for a group mortgage, you can have a family member guarantee your loan. The lenders usually take into account the income of the guarantor as well as your own. Although you would bet the only one to make payments, both of you would be liable.
Figures presented in any proposal for finance need to be realistic and must allow for downward trends in property markets. Contingencies must be catered for while escalation of costs, need to be adequately factored in. Any valuation for the proposals becomes more credible if independent surveyors are appointed.
Before undertaking a project, always make sure to make a budget for all costs associated with settlement of the sale of a property, building your property and putting your property on the market. Once you have the budget, make provisions for a contingency fund. Your contingency fund should be 10% to 20% of your total budget.
Joint venture finance
One advantage about a joint venture financing option is that the project developer can obtain 100% funding for the construction. Of course, how the joint venture is set up is completely dependent on the development you are looking to complete. A legal document is drawn up to indicate how much income will be shared between individuals which alleviates any confusion between developers and financiers. It will also indicate who is liable for which project costs and what profits will be shared. The joint venture finance option can be used for almost all construction projects.
Commercial real estate finance carries a lot of risk due to the extended time of the projects during which conditions in the market might change which could cause a decrease in the profit of the project.
There are various options to find funding for property development and each of them operate in different ways. If you have an understanding of each of these funding methods you will be able to navigate the financing of your construction project. However, even a brief glimpse into the world of property development finance is better than nothing. But, you must still talk to professionals, legal, accounting as well as financiers. Do not sign any documents until you have had thorough discussions with your lawyer and accountant.
For help with NZ commercial real estate finance, Global Pacific is one of the leading brokers. This is their website www.globalpacific.co.nz.