Higher Development Profit with a Private Lender: 2 Projects Case Study
Same project with 20 townhouses, same build cost of $4,000,000, and same lending amount of $5,000,000. Major Bank charges 5.50% so total interest and fees is $223,000 and the development profit is $1,400,000. The Private Lender charges 8.00% and total interest and fees is $450,000 and the development profit is $2,500,000. How is this possible?
How can you pay twice the amount of interest and fees and yet make an additional $1,100,000 profit? The Bank offer (and my private lender was the Bank Manager) was approved in late 2015 and finished in April 2017.
The bank made the developer sell 14 off the plan at $425,000 per townhouse to meet a 100% presale hurdle. The townhouses were selling for $580,000 by the time they were completed.
The Private Funder only required 5 pre-sales therefore allowing the developer to sell 9 more townhouses for $580,000 each deriving additional revenue of $1,395,000 less the additional finance costs of $284,000 for an additional profit of $1,1100,000. Now what deal would you choose?
The above is a real development in a real Melbourne suburb approved and financed by a real bank. The developer chose bank funding because it was “cheaper” but it cost him over $1,100,000 in profit. Needless to say, the developer used private funding for their next project. Don’t be distracted by a “cheaper” rate – see the bigger picture.
Construction Deal Example
Here is a quick example of a scenario for a shovel ready development deal and private finance.
The GRV for this project was $6.5 million.
The site was bought for $2.5 million (not including Stamp duty) and total construction costs were $1.05 million. Total development costs for this project including stamp duty / interest / fees / consultants and other charges came to $4.238 million.
The only funds/cash equity required to be contributed to the whole project by the developer was $1.025 million and the rest was funded via debt of $3.213 million which includes funding $1.620 million out of the $2.5 million purchase price on land.
The developer made a cool $2.3 million Gross profit with only $1.025 million cash contribution from the developer. More than 50% return on equity made by the developer in the space of 9 months as my private lender funded more than 75% LVR on total development costs.