Details on structuring Development Deals

Developers often require additional funds to complete developments. Most of the developers requirements are obtained from banks however the banks reduce their risk by offering generally only 65% of the end market value of the project. Unless there is 35% profit in the project then more funds will be needed.

Offering an investor a high rate of return for periods up to 12 months can be a very attractive way to raise these funds and keep the property investments going.

When assessing a projects feasibility, developers need to make about 25% profit for a project to be successful.

If the project has a 25% profit then there is still a 10% short fall in funding. A developer borrowing 65% of the market value at interest rates of about 8% will often borrow the remaining 10% at a higher interest rate say 25% from an independent investor.

While the interest rate is high the overall cost to the developer is still small and it allows the funding of further developments.

Example:

An property professional identifies a potential property for renovation with a market value of $1,000,000 on completion.

The bank will lend 65% of $1,000,000 or $650,000
The potential profit will be 25% or $250,000
Leaving the remaining $100,000
(funded independently by another investor)

Total $1,000,000

Interest cost for the $650,000 at 8% p.a. is $52,000 and interest on the $100,000 is $25,000.

That is a total of $77,000, or 7.7% of the market value of the project.

The property is purchased at a price of $440,00 and the renovation and other costs add up to $310,000.

The investment of $100,000 can be secured with a caveat on the property or second mortgage.