Discounting pre-sales to meet bank requirements come at an unexpected cost
The opportunity cost of bank finance
| Opportunity cost of bank funding | Bank funded | Non-Bank funded |
|---|---|---|
| Gross On completion value (ex GST) | $10,000,000 | $10,000,000 |
| Off-the -plan discount to achieve pre-sales | $1,000,000 | $250,000 |
| Net On completion value (ex GST) | $9,000,000 | $9,750,000 |
| Land cost / value | $3,000,000 | $3,000,000 |
| Construction + Other Costs | $5,000,000 | $5,000,000 |
| Interest & fees | $207,648 | $526,500 |
| Total Costs | $8,207,648 | $8,526,500 |
| Maximum loan | $5,745,354 | $6,500,000 |
| (70% of TDC) | (65% of GRV) | |
| Developer equity required | $2,462,294 | $2,026,500 |
| Profit after interest | $792,352 | $1,223,500 |
| Return on equity | 32% | 60% |
*Table has been adjusted to demonstrate opportunity cost on a $10million development project
The client found that it had to offer discounts/incentives as high as 10% off its retail price to attract off-the-plan purchasers prior to commencement of construction. However once construction started, its discounts reduced to 2.5%.
The table above illustrates the impact of opportunity cost relative to dealing with a non-bank lender in two important aspects:
- An early start with construction without 100%+ debt cover as required by the majors reduced the discounting factor with a commensurate increase in profit; and
- A higher LVR approach to lending reduced equity required and therefore enhanced the Return on Equity.
Crest Capital has been active in the Perth property market for over a decade and has been dealing with a handful of select partners. It has established a direct presence in Perth and is offering new clients an opportunity to access its funding – contact us today to review your clients’ funding needs.
Crest Capital offers funding for a 12- 24 month term. It is part of a large fund manager and has capacity for loans from $750k to $25 million. In the current environment many borrowers are taking advantage of the following product offerings:
- No pre-sales construction funding
- Acquisition of development sites
- Land development and subdivision funding
- Short term loans for acquisition of investment properties
- Bridging finance and short-term loan facilities
- Funding to effect restructuring and refinancing of portfolios
- Mezzanine and preferred equity facilities are selectively available
At Crest Capital our focus is on lending in the Perth metro area and we do not currently lend into regional WA or eastern states jurisdictions.
Contact us today to discuss what is possible.
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