The Background
Development Finance Partners (DFP) was engaged by a developer seeking finance for a 70-lot residential land subdivision in South Western Sydney, NSW. The client required funding during a period of significant economic uncertainty driven by the COVID-19 pandemic. DFP’s expertise was called upon to structure a financial solution that would meet the client's needs and navigate complex market conditions.
The Project
The project involved the development of a 70-lot residential subdivision, with the client needing to settle the land before completing the tender process or engaging a head civil contractor. To move forward, the client sought a loan covering 90% of the total project cost, with pre-sales based on builders' terms, requiring only 5% deposits. This created a need for a highly structured financing solution, especially given the evolving economic situation.
The Challenge
The client faced several key challenges in securing funding:
- Early Land Settlement: The land needed to be settled before the tender process and contractor engagement, adding financial pressure.
- High Loan-to-Total-Project-Cost Requirement: The client sought a 90% loan-to-cost ratio, which was ambitious under normal conditions, let alone during the economic uncertainty of the pandemic.
- Pre-Sales Terms: The pre-sales were structured on builders' terms, with only 5% deposits, making the project riskier for potential financiers.
- COVID-19 Uncertainty: The pandemic introduced financial instability, complicating negotiations with capital providers.
- Valuation Challenges: Valuation firms were marking down property values in response to difficult economic conditions, making it harder to secure favorable terms.
DFP’s Strategic Solution
To overcome these challenges, DFP adopted a strategic and consultative approach:
- Advisory Arrangement: DFP entered into an advisory agreement with the client, establishing a clear framework for negotiations, milestones, and a risk mitigation strategy.
- Detailed Credit Submission: DFP prepared an in-depth credit submission for its Capital Partner, outlining the development proposal, project feasibility, client background, and proposed funding structure.
- Ongoing Consultation: DFP facilitated a structured consultation process involving the client, their consultants, and the Capital Partner, ensuring a seamless communication flow and alignment on the project’s financial terms.
- Risk Mitigation Strategy: Given the uncertainties surrounding the pandemic, DFP devised a risk management plan to protect the project's financial health, addressing potential delays and market fluctuations.
Results and Benefits
Through strategic negotiations and expert financial planning, DFP secured a favorable funding solution for the client:
- Finance Secured: DFP successfully arranged a combination of Senior Debt and Mezzanine Finance, covering 90% of the project’s total cost.
- Aligned Sales Targets: The finance was linked to achievable sales targets, giving the client the flexibility to manage pre-sales with only 5% deposits.
- Project Progress: The financing allowed for the settlement of the land, and subdivision works have since commenced.
- Market Uncertainty Mitigated: DFP’s ability to secure finance despite the pandemic and declining property valuations ensured the client’s project remained viable.
Conclusion
Development Finance Partners played a pivotal role in securing the necessary finance for a 70-lot residential subdivision in a highly uncertain market. By addressing challenges such as early land settlement, ambitious loan-to-cost requirements, and economic instability, DFP provided a structured financial solution that enabled the project to proceed. The client benefited from expert guidance, ongoing consultation, and a finance solution tailored to their unique needs, ensuring the successful launch of the subdivision works.