Developers need to think outside the square for funding

Developers need to think outside the square for funding

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REAL ESTATE INVESTMENT

ALERT NO. 16

In this newsletter, we outline some matters which may assist developers in obtaining funding for their next project in what is becoming an increasingly difficult market. In particular:

  1. Fund through structures – what are they and what are some issues that need to be considered;
  2. Non-bank lenders – a funding source developers need to know more about;
  3. New ways of marketing developments – the 3D revolution

FUND THROUGH STRUCTURES – WHAT ARE THEY AND WHAT ARE SOME ISSUES THAT NEED TO BE CONSIDERED

There has recently been commentary on the potential increased use of fund through structures to fund the development of office and other commercial buildings.

What is a fund through structure?

The concept involves the developer selling the property prior to the commencement of the development, with the buyer funding the construction costs. At the end of the project, the title passes to the buyer. The benefit of this structure is that there is no need to involve a bank or other lender in the development as the buyer funds the construction costs.

These structures generally work where the developer has signed an agreement to lease with a major tenant for the building. The buyer, therefore, knows that subject to the construction being completed as required under the agreement for lease, it will ultimately own a new building the value of which will be underpinned by the lease in favour of the tenant.

Can it be used in funding residential developments?

Although the structure clearly works in the above scenario, it requires the finished development to be leased and for the buyer to become the owner of the finished and leased building. As most residential developments are for the purposes of selling the end product, the fund through the structure is not adaptable to normal residential development.

Having said that, there may be scope to use the structure in the case of build to rent projects as well as aged care developments, childcare centres and student accommodation.

With the lack of appetite by the banks to fund the development projects, and the large pool of capital seeking real estate investment opportunities in Australia, it is reasonable to assume that this type of financing will be used more often and across a broader range of asset classes than has previously been the case.

Key documents

A key document in relation to fund through structure is the development management agreement between the developer and the buyer. In addition, the terms of the agreement to lease as well as any other documents which underpin the title and value of the property need to be carefully reviewed and negotiated to ensure the interests of both the developer and the buyer are protected.

Having been involved in a significant fund through project in Brisbane, we have no doubt as to critical importance of making sure these documents cover as many scenarios as possible to ensure that the parties have guidance as to how to resolve issues that invariably come up during the course of development projects.

NON-BANK LENDERS – A FUNDING SOURCE DEVELOPERS NEED TO KNOW MORE ABOUT

We have previously written about the non-bank lending market – click HERE to see our October 2017 Newsletter.

The market continues to grow

Since that edition, the number of participants in, and the amount of capital available from, the non-bank lending market has increased. At the same time, there has been no increase in the level of bank funding available for development with some commentators suggesting that the outcome of the Hayne Royal Commission will lead to even further tightening of bank credit.

These factors as well as the trend in the US and the UK which indicates that, as a percentage of the total commercial property finance the share of the non-bank lenders in Australia is low, imply that the non-bank lending market is set to continue to grow in Australia.

What does this mean for developers?

From a developer’s perspective, it is therefore important to understand this market and the participants in it so that connections can be made, and relationships developed, to facilitate the funding of their future projects.

We have developed good relationships with a large number of these lenders and have participated in activities to help educate the market as to the benefits which flow from this growing segment of the finance community.*

*Click HERE to request a copy of my article in the Australian & New Zealand Property Journal which provides a detailed review of the non-bank lending market in Australia.

NEW WAYS OF MARKETING DEVELOPMENTS – THE 3D REVOLUTION

In the current difficult market for off- the- plan sales of apartments and property generally, the need to capture the attention of buyers as well as financiers is more important than ever.

How can smart 3D assist developers?

With the world becoming increasingly more focused on visual aspects and wanting to use technology that makes life easier, the property industry needs to move with these trends to capture the imagination not only of buyers but also town planners/councils and financiers.

We have recently been introduced to such technology. It allows developers to showcase their development using 3D technology but in a manner which we understand is beyond that which has, up to now, been available.

With the use of smart high definition 3D technology, buyers, town planners and financiers cannot only walk through the finished apartment they can also:

  • See how the building will look on the actual street it is to be constructed on, next to the buildings that are currently there
  • View the exterior of the building and the interior of apartments from any angle
  • Change the furniture in the apartment by choosing different colours and shades as well as different pieces of furniture from a database of 50,000
  • See how the natural light in any particular room will change during the course of any day of any month/season
  • See how close the building is to the nearest schools, railway stations, restaurants and shopping centres.

Think outside the square

The above functionality will simplify and enhance the experience not only of buyers but also town planners, councils and other decision-makers who need to approve a project and financiers who are considering whether to fund a project. The ability to see how the development will look when complete in the location in which it is to be constructed is likely to assist each of these decision makers in reaching a decision on the project.

The use of such technology, as well as the use of different ways to fund property projects, provide developers and property investors with tools to navigate the ever changing property development market.

If you would like to discuss any of the above please feel free to contact us.

Peter Faludi Consulting

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The comments made in this Alert do not constitute the provision of any legal, tax or accounting advice by Peter Faludi Consulting or any Director or employee thereof and therefore you should not rely on this Alert in making any decisions relating to present or future transactions in which you are involved. We strongly recommend that you seek legal, tax and/or accounting advice (as relevant) in relation to the same.
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