Development Finance -Private Money. A better deal than Bank Funding in this scenario
By Llew Leeming, Head of Development & Investment Finance at PCL Money
Last week we settled a Private Money Development Finance loan for an old client and friend of mine. We also worked in collaboratively with my Client’s accountant as part of a collegial ‘value chain’.
The Value Chain is an enduring legacy from my time at St George. The Value Chain puts the stakeholders in a deal on an equal footing and respects the abilities, insights, and responsibilities of each of the players. At its best, the Value Chain becomes a ‘real’ Team, not just a ‘deal’ team.
By contrast the old Supply Chain concept inevitably ends up being hierarchical with the accountant, solicitor, banker, broker, etc. competing with each other to be closest to the lead entrepreneur at the top of the chain.
Our Value Team became the Client, the Developer’s Marketing Manager and the Operations Manager, the Accountant, the Broker, the Credit Manager, the Builder, the Valuer, and the QS.
I had to beat two competing offers from St George and CBA, at literally half the price.
My initial advice to my client was that I could set the deal easily with any Bank, (including the existing offers), that currently had capacity for Development Finance.
Having been around long enough to know that ‘one should never assume that you know your client’s needs better than your client does’, I also presented a Private Money scenario.
We worked through the pros and cons of the alternative funding scenarios together; and this is what we came up with:
Private Money could deliver fastest, with realistic pre-settlement conditions.
Private Money would ‘cost’ roughly double the Bank Funding rate.
Private Money could accommodate the deal without pre-sales, (given the sponsor’s strength).
The client believed he could achieve sale prices around 10% higher if he commenced selling after the project had gone ‘vertical’, rather than pre-selling off the plan.
Starting without pre-sales meant the project could get underway immediately.
The geographical market, Canberra, was forecast to have two years of growth left in it. Starting the first stage immediately, meant that future stages could capture the growth in the market over the next two years.
We looked at a deal with the builder to hold the first two months progress payments as an initial claim so that we could shorten the term of the loan and reduce interest costs.
The accountant calculated that Bank Funding would cost around 5% of the gross realisation versus Private Money at 7.5% of Gross realisation, therefore, if the project achieved 10% higher Gross Realisation, they would gross 3 times the additional finance cost in profit. This was a new way of looking at project funding for me and I think it’s pretty clever!
Part of the way we do Private Money lending at PCL is to ensure that 100% funds are held in in a dedicated project bank account prior to settlement. This ensures security of payments throughout the project. Technically this is a more secure line of funding than a bank – but in reality, at least equal.
Our principal, and Credit Manager, made the trip to the ACT to meet with the client, tour the site, and get to build a relationship as part of our negotiations.
Many of our telephone discussions, across the Value Chain, took place outside of work hours and on weekends, saving lost hours and days from the funding process.
We were able to provide an indicative approval within one week of the loan application, and to settle the facility before the first progress claim from the builder was due.
In summary, for this particular deal, the only advantage that Bank Funding had over Private money was cost.
Every deal is different, every customer’s needs are different, and there is no such thing as one solution for everybody.
The ability to negotiate, tailor a solution, work collaboratively throughout the Value Chain, genuinely care for each other, and to share in the excitement and enthusiasm that any truly great entrepreneur brings to a team, is intrinsic to Development Finance.
This year marks my thirtieth year as a Property Development Financier, I still get a kick out of it, and I’m still learning new things. What a blast!
If you have any questions about Development & Investment Finance then for a confidential discussion and friendly advice you can phone Llew on 0422 008 089 or Email: llew@pclmoney.com.au
PCL Money offers a full continuum of Property Finance for all projects with excellent intermediary relationships with all major 1st & 2nd tier banks; finance companies, investment funds, and private money.
PCL Money can arrange finance for all forms and sizes of Property Development, Property Investment and Owner run property businesses such as Accommodation and Childcare.
With over 30 years industry experience PCL Money is one of Australia’s most experienced finance brokers. At PCL Money, your needs are our most important consideration.
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Please note that the above is general financial information only and is not intended as personal financial advice for which you should contact a licensed financial professional.