Written by David Lovato – CPC Development Lending Solutions

You’ve probably seen the news on the collapse of Silicon Valley Bank – the second-largest in American history.

So what happened?

* SVB had to sell securities at a loss to get cash
* To counter this loss, SVB announced it would sell US$2.5 billion of shares
* Investors advised companies to withdraw their funds, which prompted a bank run
* Within 48 hours, the federal government had to step in because the bank could no longer pay its clients

In the wake of the SVB collapse, and the consequent downgrading of the entire US banking sector from stable to negative by Moody’s, Australians may be wondering how safe our banks are.

Australian banks are strictly regulated and must comply with prudential standards. The regulatory body, APRA (the Australian Prudential Regulation Authority), is an independent statutory authority that answers to the federal parliament.

Although APRA does everything it can to prevent a financial institution from failing, it can’t guarantee that will never happen.

If an APRA-regulated institution fails, the government can activate the Financial Claims Scheme, also known as the ‘government guarantee’, under which the government guarantees deposits of up to $250,000 per account holder.

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Crowd Property Capital is a property development finance specialist. We help you structure and submit your finance applications to lenders across Australia. Contact us at [email protected]

Written by David Lovato – CPC Development Lending Solutions

The key ingredient in any property development is finance. Sometimes, the best way to finance a project is with a traditional loan. At other times, the developer may need to take a more creative approach.

In that case, the developer could consider applying for mezzanine financing or preferred equity financing. But which one?

Mezzanine financing

Mezzanine financing is secondary financing.

For example, if Developer A takes out a loan from Lender B to develop a property and needs additional financing, Developer A can ask Lender B for additional funds in the form of mezzanine financing or ask Lender C for mezzanine financing.

Lender C can only grant mezzanine financing with Lender B’s permission. Once the project is complete, Lender B will be repaid first, then Lender C and then only Developer A.

If there are insufficient funds to repay Lender C, the agreement Lender C has with Developer A will determine what happens next:

• Lender C could take a share of Developer A’s project
• Lender C could claim the property or part of the property
• Lender C might book a loss, especially if Developer A is declared bankrupt and Lender B has claimed the property

Because Lender C’s position is risky, and subordinate to Lender B, mezzanine finance is often expensive and has strict borrowing conditions.

But there are several advantages:

• Mezzanine loans are at higher loan-to-value ratios, so developers can access extra funding
• Mezzanine loans may work out cheaper than forming a joint venture with another company to raise additional funds
• The developer has to put less of their own money into the project
• Repayments are often delayed until the end of the project, which helps with cash flow

Preferred equity financing

Another form of financing is preferred equity financing, which gives the lender an equity stake in the project, which usually involves a percentage of the project profits. With preferred equity, you surrender a stake in your project and give the lender a preferred pay-out position ranking ahead of the common equity shareholders.

In this scenario:

• Lender B provides a loan to Developer A on a fixed interest rate at an agreed LVR
• Preferred Equity Financier C loans funds that are secured against the borrowing entity  in the form of a project shareholding (rather than a registered second mortgage)
• Preferred Equity Financier C is repaid a fixed rate or return and/or profit share at the end of the project ahead of Developer A
• Generally Lender B will count the preferred equity funding as if these funds were Developer A’s own funds, which will allow better terms to be negotiated with the senior lender

Which is better?

With preferred equity financing, the developer gives a share of the project to the lender. This means the lender also has a share in profits earned. This ownership also gives the lender the right to interfere with the running of the project and ability to ‘step in’ and take control if things don’t go as originally planned.

In contrast, a lender that offers mezzanine equity financing does not automatically receive a share of the project as mezzanine is regarded as secured debt. So the relationship is very clear: the lender receives their principal and agreed interest at the completion of the project.

But if the lender can’t get mezzanine financing, then preferred equity financing may be a good option. That’s because getting only a portion of the profits is still better than not getting the project off the ground and earning nothing.

Crowd Property Capital is a property development finance specialist. We help you structure and submit your finance applications to lenders across Australia, whether you need a conventional mortgage, mezzanine loan or preferred equity loan. Contact us at [email protected] or fill in this form.

Written by David Lovato – CPC Development Lending Solutions

There are many factors a property developer needs to consider when starting a new development.

For example, if you want to finance a new development, you’d probably need to:

* Pre-sell the properties
* Apply for bridging loans
* Apply for specialised property loans
* Apply for personal loans

When assessing these applications, lenders could consider all or one of the following:

* You and your business’s credit history
* You and your business’s track record if you’ve developed properties before
* The business plan and viability of the project

Consulting a development finance specialist could help you:

* Make the right finance choices
* Get your development financed sooner by helping you with your application and business plan
* Potentially save you money by getting you better interest rates

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Need development finance? CPC Development Lending Solutions can help you get your next project funded. To confidentially discuss your options, contact David Lovato on +61 434 932 634 or [email protected]

Written by David Lovato – CPC Development Lending Solutions

Have you ever wondered what might happen if your builder went bust halfway through your project?

I have first-hand experience of this problem.

Back in 2009, during the GFC, I was a young project manager working for an ASX-listed developer, when a builder that was doing three of our projects entered administration. All our sites got locked overnight. It turned out the builder owed $30 million to their creditors. We were shut out of our projects for six months, until we were able to legally take back possession of the sites and engage a new builder. It was a costly lesson.

Why do I bring this up? Because the current chatter within the industry is that lots of builders are struggling to pay their bills right now, largely because construction costs are at their highest level in 21 years.

So the thing that happened to my employer all those years ago might happen to you too.

How to protect yourself from financial risk

Don’t choose a builder based solely on a Google search. There’s too much money at stake for that. Instead, do thorough due diligence.

Here are three steps you should take to minimise your risk:

1. Check their financials

It’s perfectly legitimate to ask a builder to provide their most recent tax return and a consolidated cashflow forecast. Be wary of builders that are reluctant to provide this information. You want to understand who their other clients are and whether they’re properly resourced to manage multiple projects. You also want to find out how much revenue they’ve forecast for the next two years, because, with some builders, their cashflow might be destroyed if even one client refused to make a progress payment.

2. Check their legals

It’s important to understand your builder’s company structure and class of licence. Be wary of builders that set up shelf or subsidiary companies for their building contracts. You should always understand who the directors are, and if they’ve had any insurance or legal claims against them, whether with this company or another one. Also, take the time to review the individual licence details of the nominated supervisor to make sure that person hasn’t had any historical compliance issues.

3. Do a credit check

Engage a credit and risk assessment firm like Newpoint Advisory or Dun & Bradstreet to do a background check on any builder you’re thinking about engaging.

Don’t forget to do these background checks as well

There’s more to due diligence than just doing finance and legal checks.

When you research builders for development projects, you should also do these three things:

1. Check for relevant experience

Of course, you want to choose an experienced builder. But you also need to make sure your builder is experienced in the specific project you’re planning. For example, if you’re going to develop apartments, don’t engage a builder that only has house experience. Choosing a specialist will mean your builder will understand the building codes and design issues relevant to your type of project, and will also know subcontractors with relevant experience.

2. Visit previous projects

Any builder you talk to will tell you how great they are (and will probably have some nice-looking photos too). But you wouldn’t be conducting proper due diligence if you took their word for it. So take the time to visit some of their finished projects. Also, speak to building and strata managers to find out how responsive they’ve been when residents have moved in and they’ve been asked to fix any problems that have cropped up. That will tell you how committed they are to delivering quality work and maintaining their reputation.

3. Talk to other clients

Ask your builder to provide contact details for two or three other clients. When you speak to those other clients, ask them what sort of quality the builder delivered, how they managed the project, what their service was like and how their subcontractors acted.

CPC Development Lending Solutions can help you get your next project funded. To confidentially discuss your options, contact David Lovato on +61 434 932 634 or [email protected].