How to improve your property funding outcomes in 2021

How to improve your property funding outcomes in 2021


February 2021

How to improve your property funding outcomes in 2021

If 2020 has taught us anything, it is that you need to expect the unexpected. You need to adapt/change your way of doing things to minimise adverse outcomes arising from unforeseen events.

In the context of property transactions in 2021, this includes:

  • considering a broader range of funding options, and
  • rethinking the type and location of your projects and the people you wish to involve in them.

In this Alert, we discuss some of the changes investors, developers, and borrowers may need to consider in their approach to funding their 2021 projects. In particular, we discuss:

  • The property funding spectrum. Broaden your horizons but beware of the risks,
  • Why negotiating funding documents will improve your funding outcomes, and
  • Some practical lessons learned from the:
    - Mandatory Leasing Code, and
    - the NSW development and construction industry reforms.

The bottom line:

Given our comments below, for property investors and developers to improve their funding outcomes in 2021 they should:

  • broaden their funding sources while at the same time being more aware of the terms of such funding and the benefit of doing due diligence on the proposed funder,
  • be more conscious of the need to negotiate documents before signing them to ensure their interests are protected in difficult times,
  • consider if their strategy for 2021 is appropriate in view of the market and regulatory changes,
  • assess their internal processes and procedures to ensure compliance with new laws and,
  • review their consultants and contractors to make sure they will meet the standard required by the new laws and their financiers.

The property funding spectrum. Broaden your horizons but beware of the risks

As mentioned in previous Alerts, the sources of funds available for property investment and development have exploded in the last 3 years.

Whereas traditionally such funds were provided by the major Australian banks, now such funds are available from a variety of sources. These include foreign banks, a variety of non-bank/private lenders (including private equity and high net-worth individuals/family offices) and funds established to lend money for property transactions.

Funds can be provided by way of senior or subsequent ranking debt or equity (including through joint ventures) and can be secured or unsecured (although this would be unusual, especially in the case of debt).

To improve the likelihood of getting funding, investors and developers need to consider a broader range of funders than those they are used to. We have recently been involved in a number of matters where borrowers severely limited their potential source of funds. This resulted in loans being accepted at a higher cost and on more onerous terms than was otherwise available in the market.

The broad spectrum of funding brings with it a number of additional risks for borrowers. These include:

  • potential issues as to the availability of funds on settlement or to meet progress claims in development projects, and
  • the inclusion of different or previously unused terms and conditions in loan documents which may have adverse financial consequences to borrowers.

The above risks can have significant adverse financial consequences to borrowers. These include:

  • settlements falling over or being delayed, and
  • progress claims not being met resulting in project delays, purchasers walking away from their contracts and the borrower going into default under other loans or becoming insolvent.

While the above risks and consequences are less likely when borrowing funds from a major Australian Bank, in the case of some of the alternative funding sources now available, to minimise such risks borrowers may need to do due diligence on their funder.

Borrowers need to get comfortable that funds will be available when needed and that the funder will be reasonable in dealing with problems associated with the project.

Why negotiating funding documents will improve your funding outcomes

Some alternative funders include different or more onerous terms in their loan documents than those traditionally found in Australian bank documents.

These terms can lead to significant additional costs or adverse outcomes to the borrower. An example is the minimum return requirement (and other fees charged) and when they are payable.

Borrowers need to pay more attention to these and other terms found in loan or funding documents. The days of assuming the documents will be “standard” are gone. Even standard documents need to be understood before they are signed as they inevitably contain terms that will surprise a borrower.

One of the benefits put forward by non-bank lenders is their ability to be more commercial and reasonable than the major banks when considering transactions. An investor or developer should put this to the test. Don’t accept terms without knowing what they mean and always seek to negotiate them.

The old saying “if you don’t ask you don’t get” definitely applies in the new world of property finance.

Some practical lessons learned

The Mandatory Leasing Code

The Mandatory Leasing Code adopted throughout the country during 2020 had a number of consequences for property investors. In the context of their funding, the main consequences were:

  • rental income was reduced adversely affecting payment of interest on their loans,
  • interest cover ratios were breached, and
  • the value of the property declined causing breaches of loan to value (LVR) ratios.

This resulted in loans going into default and/or terms of loans being reviewed.

In addition, the impact on valuations made it difficult for valuers to provide valuations as high as was the case prior to the pandemic. This reduced LVR’s for new loans and required more capital to be invested in a project by the borrower.

Knowing this, borrowers now need to consider the level of capital they have available for projects. They should also consider what changes should be made in loan documents to minimise the above consequences if similar circumstances arose in the future.

We suggest you seek greater flexibility in relation to the operation of various loan covenants in circumstances such as those we experienced in 2020.

 Development and construction industry reforms

As you are aware, substantial reforms to the development and construction industry were introduced in NSW in 2020 – see our February 2020, June 2020 and August 2020 Alerts for more details. Currently, these reforms are limited to the development of residential property (other than freestanding detached houses). They also extend to mixed-use developments incorporating residential property.

Failure to comply with these reforms can lead to hefty fines, disciplinary action and project delays. It can also result in potential liability for breach of the laws for up to 10 years after construction work is completed and personal liability for company directors and others for contraventions.

The above risks and consequences are likely to be considered by financiers when assessing applications for development funding. The additional risks may impact on the pricing of loans as well as the financial and non-financial covenants and undertakings contained in the loan documents.

To minimise the above consequences, developers and building and design practitioners may prefer to become involved in more non-residential projects going forward.

Those that continue to be involved in residential development will need to consider their internal processes and procedures to ensure compliance with the new regime. They will also need to consider the quality and track record of all consultants and builders involved in a project. While the quality and track record of such parties has always been a significant factor to be considered by financiers, the overlay of the reforms will make this even a higher priority for financiers.

We trust you find the above useful as a first step in improving your property funding outcomes in 2021.


Please feel free to contact me to have a complimentary 20-minute discussion to see how you these matters affect you, including your current and future finance arrangements.


Author of “The Ultimate Short Guide to Property and Development finance in Australia. There is much more to it than numbers”

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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