When putting together an application for finance projects, what better way to narrow the focus of the application to the elements that lenders themselves recommend.
Finance company Holden Capital have put forward what they see as the key elements of a loan application for a property project. They see them all the time so would know better than anyone what they, and companies like them, are looking for when deciding to provide finance for property projects.
Financial position and credit worthiness
The meat and potatoes of the loan application, these are the facts of your financial position and ability to service the loan being applied for and there’s little point trying to alter these artificially to further the cause.
Realisation values and project expenses
The land value, product prices and build costs that are relatively defined values and determined by the market.
The team building the project and their past experience
More pre-defined components of the loan application, these elements have been locked in and documented as part of the application, and may be boosted by testimonials to give lenders confidence in the team and its past success in property developments.
Capital structure and project feasibility
The capital structure is driven by the combination of debt and equity and how much equity is contributing to the transaction, and the project feasibility draws on the known elements of costs and end values and the time required to undertake the process.
According to Holden Capital, when they are weighing up a finance application for a property project they say the one key element that is most often missing from the applications they see is the explanation of how they will sell the properties and who they will sell the property to. And they say it’s arguably the element applicants should have the most influence over.
Interestingly, Holden Capital say it’s not just the ability of applicants to pay them back the 60 per cent of the project to recoup their loan that they have the microscope on. It’s also how the potential borrower will sell that last 40 per cent of stock that really convinces them that the deal is fully understood by the borrower and gives them the confidence to invest.
In their sponsored article for Property Observer, Holden Capital give the key questions they are looking for answers to and really want to hear from borrowers.
Where is the demand coming from?
How are the market dynamics of supply and demand working and who will buy these properties?
Why will these people buy these properties?
The demand has been identified, that’s great. The lender now wants to know how the proposed product will meet that demand and why it does. Holden Capital say they want see that the developer understands the market dynamics in the area they are choosing to develop in and that they are creating a product designed to meet the market drivers.
Why is the development better than the others?
If the borrower can answer this they can demonstrate they understand what the market wants and what the competition are doing. If the borrower can’t answer this it sounds alarm bells.
What will buyers be willing to pay for the properties?
Being able to show the lender evidence of a similar property purchased for the proposed amount will be like gold to an application, and often the formal valuation report will be a precondition to settlement. If there is no valuation report then Holden Capital says they would look for evidence to support the gross realisation values in the property feasibility. Being able to point to recent and comparable market sales in support of your application increases its professionalism.
How much will it cost to secure the sales and how will they be paid for?
Property developers often do not fully understand all the issues involved in their project, and can fail to show the lender that they are truly across considerations such as marketing collateral, an on-site sales office, sales agent costs, marketeers fees and back end. Holden Capital say they can’t stress enough how important these elements of the deal are and how the potential borrower showing they understand them fully impacts strongly on their credit and equity investment decisions. In particular, how they propose to fund them all before and during the project construction phase, and it’s key to them fully understanding the profitability of the project.
The common denominator here and the consistent theme is that getting a borrower’s attention by demonstrating a clear understanding of marketing and sales processes of the project is how to gain approval for finance for big property developments.
