Property Development Loan

A developer buys land, spends eighteen months and a great deal of money turning it into twenty-four townhouses, and receives nothing at all until the first buyer settles. No revolver fits that shape — there is no cycle, only an outlay — and no ordinary term loan does either, because there is no earning business to carry instalments while the building is a hole in the ground. The development loan is built for the gap: a limit set against the project's total cost, drawn in stages as independent certificates say the work has been done, with interest added to the balance instead of paid, and the whole of it repaid from the settlements at the end.

It is the product on this shelf with the least margin for error, because every ordinary lending protection arrives late. The security is bare land until the building is finished; the cash flow that repays the loan does not exist until buyers settle; the borrower is often a single-purpose company with nothing behind it but the project and the people. What the desk lends against is a plan — a feasibility — and the whole product is a set of mechanisms for making sure the plan and the ground stay in step. The guide Property Development Finance is the reading; this file is the facility.

The limit — set against total project cost (land, build, fees, capitalised interest and contingency), expressed as loan to cost, and checked against the completed value as loan to value on completion. The developer's equity is spent first; the bank funds from there. Conditions precedent — the things that must be true before the first dollar is drawn: consents, a fixed-price build contract with a builder the bank has looked at, the required share of presales signed with deposits paid, insurances, and a quantity surveyor's report that the budget will build the building. Progressive drawdown — each construction claim is certified by an independent QS before it is funded, and each drawdown re-runs the cost-to-complete test.

Capitalised interest — the loan pays its own interest until the sales arrive, which means the interest is inside the budget and inside the limit, and a delay costs money twice: more months of interest and later settlements. Security — a first mortgage over the land and everything built on it, a general security agreement over the development company, a tripartite deed with the builder so the bank can step in and finish, and the directors' guarantees. Repayment — from settlements, with an agreed share of each unit's net proceeds going to the bank until the debt is cleared; or, for a building to be held and let, by refinancing onto a term loan once it is complete and leased. Fees — an establishment fee, a line fee on the limit, and the QS's and valuer's costs, all of them paid by the project.

The margin is higher than on any other file here, and it is still not the expensive part. The expensive part is time. A constructed illustration, every figure invented for teaching — a US$8.0m facility drawn evenly over a twelve-month build at 9.00%, with sales settling over the following three months:

A six-month delay does not add six-twelfths to the interest bill; it adds six months at the highest balance the loan ever reaches, because the delay comes at the end, after everything has been drawn. That is why a desk reads the programme as hard as it reads the budget, and why the contingency has to cover time as well as cost. On Issue 08's file, a 5% overrun on the build — about US$0.48m — would on its own exceed the whole 3.5% contingency, before a single month of delay had been counted.

The feasibility, backwards. Start from the gross realisation — what the units will sell for, which a valuer confirms — and subtract every cost to reach the margin. Then ask what takes the margin away: prices falling in the suburb (−4% in six months on Issue 08's file), the build running over, the sales running late. A development is lendable when the margin survives the things that usually happen.

Presales, and whether they are real. A presale is the loan's first way out, so the desk reads each one: deposit paid and held, a buyer who can settle at completion, a contract that does not depend on the buyer's own sale, and no contracts to the developer's family and associates propping up the count. Forty per cent presold against a policy of sixty is not a rounding difference; it is a third of the repayment source missing.

Cost to complete, every month. The question the bank asks at every drawdown is whether the money still available will finish the building. A QS certifies the claim and the remaining cost; an overrun is the developer's to fund before the bank funds the next claim. The contingency is the developer's promise about how much can go wrong before that conversation happens. The developer. A claimed track record — Issue 08's 28% return on equity — is a claim in a deck until a completed project, a settled loan and a builder who worked for them say otherwise. The senior read on that file is neither the requested structure nor a decline: offer the relationship, not this deal — a smaller project first, or this one at materially lower leverage.

A contingency that is not one. Three and a half per cent of a build cost is not a buffer; it is a rounding error dressed as one. The first variation consumes it, and every claim after that is a negotiation about who funds the gap.

Presales that evaporate. Buyers who cannot settle when the bank valuation at completion comes in below the contract price; deposits that were never paid; contracts with the developer's own entities. The count that satisfied the condition precedent turns out to have been a count, not a repayment source.

Time. A wet winter, a builder who goes under, a consent condition discovered late. Every month of delay is charged at the full balance, and the interest reserve inside the budget runs out before the building does.

Competing for the deal instead of reading it. Two other banks circling, a growth target, and a term sheet written to win — with the presales condition relaxed to get there. The structure that wins the deal is the one that gives up the protections the product exists for. On a first-time counterparty at this point in a price cycle, the senior answer is the relationship on a project the bank can actually stand behind.

Issue 08 is this product under competitive pressure: US$8.5m of senior debt at 55% of cost for twenty-four townhouses, presales at 40% against a 60% policy, a 3.5% contingency and two other banks with the deck. Its file appendix holds the feasibility the numbers above come from. The same project is read from the developer's chair and from a buyer's chair, which is where a presale looks different. The reading behind the facility is Property Development Finance; what the bank takes as security and what it is worth on the day it matters is LVR, Security and Collateral; and the product the completed building moves onto is the term loan.