Securing development finance is a strategic process, and understanding what lenders look for can help you position your project as a low-risk investment. In this post, we’ll break down five key metrics that lenders assess when evaluating a development finance application. By addressing these metrics effectively, you can improve your chances of securing favourable terms and the funding your project needs.
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Feasibility Study: Demonstrating the Viability of Your Project
- What It Is: A feasibility study is a comprehensive report that evaluates the financial, market, and technical viability of your development project. It should include an in-depth market analysis, cost estimates, and detailed timelines.
- Why It Matters: Lenders use the feasibility study to determine if the project is viable and likely to generate a return on investment. A well-prepared study provides the evidence needed to secure approval and confidence from lenders.
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Loan-to-Value Ratio (LVR): Assessing Leverage and Risk
- What It Is: LVR measures the loan amount relative to the value of the secured asset. In development finance, this includes both the Total Development Costs (TDC) and the Gross Development Value (GDV) once the project is completed.
- Why It Matters: Lenders use LVR to evaluate how much risk they’re taking on by offering the loan. A lower LVR indicates a higher level of equity in the project, which makes it less risky for the lender (and you).
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Developer’s Track Record: Trusting Experience and Proven Success
- What It Is: Lenders prefer working with experienced developers who have a history of successfully completing projects. Your track record may include the size and scope of previous developments and how you managed past projects.
- Why It Matters: A strong developer track record gives lenders confidence that the project will be completed successfully. It shows that you have the skills to manage challenges, mitigate risks, and deliver on time and within budget.
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Pre-Sales and Market Demand: Gauging Potential Profitability
- What It Is: Pre-sales refer to the percentage of units or properties in your development that have been sold before construction begins. Lenders also assess overall market demand for the type of development you are undertaking.
- Why It Matters: Pre-sold units demonstrate to lenders that there is a market for the project, reducing the perceived risk. It also assures lenders that there will be revenue to pay back the loan.
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Contingency Plans: Ensuring Project Stability
- What It Is: A contingency plan outlines how you’ll handle unexpected events, such as cost overruns, construction delays, or changes in market conditions.
- Why It Matters: Lenders want to see that you’ve prepared for the unexpected. A clear contingency plan shows lenders that you have the foresight and financial resilience to handle challenges and protect their investment.
Conclusion
Understanding and addressing the key metrics lenders use to assess your development finance application is crucial for securing funding. By demonstrating a thorough feasibility study, a reasonable Loan-to-Value Ratio (LVR), an experienced track record, strong pre-sales, and well-thought-out contingency plans, you can reduce risk and increase your chances of approval.
Partnering with an experienced mortgage broker can also help you navigate these metrics and connect you with the right lenders for your project. We invite you to make a time to chat and find out what’s possible for you and your project.