As an alternative to TDC Development Finance Gross Realisable Value (GRV) Based Lite Doc Development
Finance is offered and is based on the end value of the project, on a “cost to complete basis”. It is
not necessarily a product designed for credit impaired borrowers, but refers to GRV based First Mortgage facilities
as opposed to TDC facilities as offered by banks. This type of funding is typically sourced via Non-Bank Financiers
and Private Lenders who are generally less stringent requiring minimum or no presales with a maximum LVR of 70%
of the GRV.
A significant benefit of GRV finance provides a Property Developer with the option of obtaining construction finance
with a minimum or in some cases no presales. This is particularly significant in markets where the property value is
growing, in these circumstances the Property Developer would prefer to sell the units at completion and thereby gain
the capital growth on the properties during the construction period.
Experienced and financially savvy Property Developers are interested in GRV finance as it provides the following
benefits:
- It gives the Property Developer the ability to contribute less equity to the project, and thereby increasing his
return on investment;
- It allows the Property Developer to use equity elsewhere and effectively diversifying risk;
- It allows the Property Developer to continue with the project on a ‘stand alone' basis;
- It is less stringent and more flexible than traditional development finance; and
- Minimum or no presale requirement could greatly increase the profitability of the project
By way of example only, the following shows the maximum borrowing potential when a project to build a residential
block of units will cost $7,000,000 and will sell for $10,000,000:
- Total Development Cost Structure:
By using the TDC method at 80% LVR, the maximum borrowing potential is $5,600,000 (80% of
$7,000,000), or a maximum of 80% of Hard Costs.
By using the GRV based facility at 70% LVR, the maximum borrowing potential is $7,000,000 (70% of
$10,000,000), or up to 100% based on TDC.
By using the GRV facility in the above example the Property Developer is allowed to potentially borrow an additional
$1,400,000 more than would be offered if the TDC method was used. It should be noted depending on the dynamics of
the project the Property Developer could potentially borrow 100% of the project costs.
Please note that the GRV facility will only lend to a maximum of 70% of the GRV based on a cost to complete basis,
however at land settlement the loan cannot exceed 70% of the value of the land ‘as is'. In cases
where the property was acquired without the relevant approvals and the Property Developer put in place the relevant
approvals and significantly added value to the land it is possible to borrow 100% of the land and project costs. In
other cases where the Property Developer acquired an approved development site it will mean that he will need to
provide at least 30% of the ‘as is' land value. On the assumption that the borrowings do not exceed
70% of GRV the project will be fully funded from there on.
By utilising the GRV finance a Property Developer is generally able to borrow more money on a project and thereby
limiting the amount of equity he will be required to commit to a project.
Below is a simple example to see the benefits to the property developer by using GRV based finance:
PROJECT STRUCTURE EXAMPLE/COMPARISON
***Please note that the rates and figures used above are for illustrative purposes only, any actual
transaction will be priced according to the specifics of the project.
As illustrated in the above example, by using GRV finance the Property Developer reduces profit by $300,000, however
is required to contribute a lot less at the front end: namely from $2,000,000 to $900,000.
It is interesting to note, if on the assumption that the Property Developer had a total of $2,000,000 to contribute
as equity, by choosing the GRV option the Property Developer could move forward on a project with a lower “in” cost.
Clearly the above outlines the benefit to the Property Developer by freeing up his equity. GRV Finance proves that
cheapest is not always the best option for Property Developers!
Contact ACG today to learn more about GRV Finance, or find out how GRV Finance can help fund your next
property development by Downloading our Development Finance enquiry
form
