DEVELOPMENT & PROJECT FINANCE – KNOW YOUR FINANCE FACTS
Anna Porter from Suburbanite works with many clubs and organisations through major redevelopment projects and renovations, but finance is always a tricky piece of the puzzle she says. “Boards of Clubs or NFPs are open to taking on debt so long as there is a clear strategy to retire the debt in a reasonable timeframe. Any significant debt held for long periods of time without an exit strategy exposes the organisation to risk and many boards just won’t take that on. An exit strategy for the lender as well as the board is paramount” says Anna Porter.
From a Finance Perspective, the current environment has thrown up 3 hot points that need to be clearly dealt with when looking for Development Funding. We turned to Richard Batten from Campbell Advisory to step behind the curtain and discover the finance facts that clubs, NFPs and organisation asset holders need to know before they build or develop.
The first insight Richard Batten offered us is to have the END in sight from the outset.
“1. Exit Strategy – When applying for Development Finance the key is to have a clear Exit Strategy….with the major Banks this is all about Pre-sales, the quality (5% v 10% deposit) the mix (resident V overseas) and the terms” says Richard.
The second insight that the team at Campbell Advisory identified for us is how the lenders view a major project is the track record of the facility/organisation. This one can certainly be tricky as many clubs or NFPs may not have taken on many major projects in their recent past as they are not developers by nature. So positioning this appropriately is the job of a good finance partner.
“2. Demonstrated Track Record – have you done this before – same size, type and market – and delivered on time and budget. If you are holding a prime site but do not have the track record to maximize its development potential, a JV partner who has is likely the best option” continues Mr Batten.
The third insight that Richard brought to the table is gearing. Many organisational investors will have some decisions to make around gearing and how much exposure to lending the board is comfortable with, as compared to investing their surplus cash and the risk and lost opportunity cost of that decision.
“3. Gearing – this includes what equity you have, or propose to have, if rolling from an existing development– in the current market valuations are not showing uplifts in ‘on completion valuations’ and as a result lenders valuations are lower, which is pushing down the acceptable gearing.”.
Mr Batten continues “The traditional banks are very conservative in their Due Diligence Requirements, LVR and geography restrictions– and there are a number of funds looking to support development funding – but at a price. The question then becomes do you have the margin in the development to support the higher costs of Finance – particularly if the time from any or all of the stages, purchase to construction to completion to settlement blow out?
For those sitting on land, the painful question is should they develop with an optimistic approach, hold for better conditions or sell? This is where trusted adviser can assist” finishes Mr Batten.
Finance Facts in a nutshell – Richard Batten, Campbell Advisory:
1. Know your end game from the outset and work with your finance advisor to craft a suitable exit strategy
2. Consider JVs if you don’t have a track record of development
3. Get the gearing right and be aware that the lenders will have restrictions on this based on a number of assessments, not just a blanket policy
4. Finance structures are getting tougher for more complex builds/development so partnering with the right finance advisor is more critical than ever so it can be positioned with the lender the right way from the outset
