Bank Vs Non-Bank in townhouse project funding: Holden CAPITAL case study

Bank Vs Non-Bank in townhouse project funding: Holden CAPITAL case study
Jonathan ChancellorFebruary 6, 2021

 

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With interest rates at levels not seen for generations, the conditions are ripe for fresh approaches to construction funding methods and while the majority of construction debt is sourced from the major banks.

HoldenCAPITAL have utilised their experience and real-time market data to access alternative lending institutions securing some attractive alternatives to suit individual client needs. This includes the sourcing and negotiation of Joint Venture Partnerships and passive equity investment for medium to large sized projects.

The HoldenCAPITAL team is often asked what is the difference between bank and non-bank funding and in most instances there are only three significant differences:

• Interest rate 
• Pre-sales requirements 
• the amount of equity commitment required from the borrower.

Two of these factors are easily quantifiable but what about the question of pre-sales?

Pre-sales or no Pre-sales 

Interest rate and equity requirements might initially indicate that one option be preferred over the other, but if we assess their specific requirements with a full understanding of the project and market conditions, the best choice might not be the most obvious. The best way to illustrate this is by way of a case study that HoldenCAPITAL has prepared.

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Funding table comparison 

Bank and non-bank lenders have different requirements regarding loan ratios. Most non-bank lenders are so called gross realisation (GR) lenders and the main criterion for them is a loan to value ratio (LVR) of no more than 65%. Bank lenders also require a maximum LVR of 65%, but in addition they impose a limit of no more than 80% of the total development cost (TDC).

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These differences in lending criteria allow you in many cases to borrow more when choosing the non-bank option. In this case study, the required equity contributions are:

• Bank option of $1,118,100, compared to 
• Non-bank option of $603,240 – a significant reduction.

The internal rate of return (IRR) on an investment or project is the annualised effective compounded return rate. It is commonly used to evaluate projects and gives a return that can be compared against the annual cost of capital. As can be seen in the graph below, as a result in the lower requirement for equity, the non-bank option shows a much higher return on equity and the internal rate of return is more than double that of the bank option.

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The benefits of managing project timing 

The bank option benefits from a significantly lower total interest cost however, the non-bank alternative does not require the delay of between 3-6 months associated with the pre-sales requirement and benefits from a lower requirement on developer equity with the potential for a significantly increased return on investment.

The key differential is that the non-bank option potentially allows the project to be completed in a shorter timeframe with a consequential reduction in the potential for a market shift to impact the project viability. 

Daniel Erez, Managing Director of New Ground Properties endorses these points noting that “For every pre-sale we currently secure we could probably sell 4-5 near completed units…”.

In the case of a no-presales option “… we are still providing the same de-risking strategy by selling out prior to completion, the difference is that it is happening later in the project … you don’t need to fund the pre-sales and commissions are paid 100% from settlement proceeds.”

To find out more about which option best suits your next project, contact Dan Holden at HoldenCAPITAL on 0401 669 502 or visit HoldenCAPITAL here.

 

Jonathan Chancellor

Jonathan Chancellor is one of Australia's most respected property journalists, having been at the top of the game since the early 1980s. Jonathan co-founded the property industry website Property Observer and has written for national and international publications.

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