Are you an ambitious entrepreneur or investor seeking lucrative opportunities in the real estate market?
Commercial development is an exciting avenue to explore, enabling you to leverage your vision and financial acumen to create profitable ventures.
In this article, we explore the ins and outs of securing a loan for a commercial development.
How much can I borrow?
A commercial development loan is very similar to a residential construction loan, except lenders are generally a little less lenient when it comes to Loan to Value Ratio (LVR).
With a standard commercial property, you may be able to borrow up to 75% of the Land to Development cost Ratio (LDCR) or 65% of the as-if complete valuation.
However, there are also non-standard properties or specialised commercial properties, such as hospitals, childcare centres or landfill and waste management facilities.
Specialised commercial properties like these tend to have a lower LVR of around 50-60%.
These figures provide an approximate indication of how much you should expect to borrow for a loan term of around 2-3 years (which is approximately the time needed to construct a commercial property).
What can I use as security for the loan?
What does the valuation process involve?
There are typically two valuations that take place. One is for the construction cost plus the land value, and the other is for the as-if complete value, which is usually higher.
For example, if the land costs $2 million and the cost to build the development is $6 million, the total cost will be $8 million. This means you’ll likely be able to borrow up to 75% of this figure, which is $6 million.
However, at the end of the construction of a 30-unit block, with units selling at $500,000 each, the final value might be $15 million.
So, at an LVR of 65% of the as-if complete valuation, you’d be looking at borrowing up to $9.75 million.
However, lenders will usually take the lower of the two, so you might only be able to borrow up to $6 million for the entire development.
Generally, you will be required to pay for valuations. The lender will organise a valuer that specialises in the type of commercial property that you want to buy, and the valuer will base the valuation on the development plans you have in place. It’s quite a thorough process.
The valuer will want to know:
What do lenders want to know?
Ultimately, lenders want to be assured that they’re going to get their money back.
This means you may need to secure a certain number of presales to satisfy the lender’s requirements, to show that the property can be sold.
Or, if you intend to hold some of the units/ property yourself, you must show that rental income can be generated to pay back the loan.
The lender will also likely want to know if you have any experience in developing these types of properties, as this will minimise the risk on their side.
Disclaimer:
This article is written to provide a summary and general overview of the subject matter covered for your information only. Every effort has been made to ensure the information in the article is current, accurate and reliable. This article has been prepared without taking into account your objectives, personal circumstances, financial situation or needs. You should consider whether it is appropriate for your circumstances. You should seek your own independent legal, financial and taxation advice before acting or relying on any of the content contained in the articles and review any relevant Product Disclosure Statement (PDS), Terms and Conditions (T&C) or Financial Services Guide (FSG).
Please consult your financial advisor, solicitor or accountant before acting on information contained in this publication.
Proudly Part Of
The Money Quest Group (MQG) is one of Australia's leading boutique mortgage broking businesses, with a network of more than 600 brokers nationwide. Known for their exuberant culture and superior support, MQG provides brokers access to a range of financial products from more than 60 lending institutions and suppliers, and exclusive access to in-house benefits and services.
© 2017-2024 MoneyQuest Australia Pty Ltd, Australian Credit Licence 487823