When unexpected changes in the market arise, it is important for developers to turn to experts early on to ensure that projects not only stay afloat but also profitable.
The property development sector is struggling under the weight of rising construction costs, material delays and labour shortages - putting pressure on developers who have financially committed to a project under construction.
With market conditions such as these, open communication with stakeholders and creative solutions are vital to prevent a project from becoming financially distressed. This is where loan workouts come in.
What is a loan workout?
Put simply, a loan workout is an agreement between a lender and borrower to renegotiate the terms of a loan to benefit both parties and prevent loan default.
In a loan workout agreement, the terms of the original loan are liquidated, with new terms agreed upon, such as extending the timeline of the loan or changing the payment schedule. This can also include new sales and building processes designed with the current market in mind.
An experienced finance expert can help developers negotiate and implement a workout agreement that will end in the successful completion of a project.
This is best organised as early as possible, as experts have access to a network of property professionals such as valuers, quantity surveyors, property lawyers, and more, who can provide guidance at each step, from early site analysis through to workout placement.
How DFP can help
Development Finance Partners has extensive experience in guiding developers towards profitable outcomes.
One example of this is a loan workout we organised for a recently completed 42-apartment development on the Central Coast in NSW. 8 of the apartments had been sold, 4 contracts had been exchanged but not yet settled, and 8 properties were still subject to lease agreements.
Due to flooding issues, the apartments did not sell as well as expected, leading to the project's default under the mortgage facility. DFP formulated a sales process, drip-feeding the properties to the market to maximise value. As well as this, the 8 leased apartments were assigned a vacation schedule to further maximise rental returns, while also allowing units to become available for sale as they were completed. These steps resulted in a substantial increase in the project’s overall return, raising it from $8.9 million to $12.3 million.
Similarly, DFP also advised another client on a development that was no longer viable in the market because of its price point, cost to complete, and design. The original plan consisted of three lots separated into luxury apartments, affordable housing units, and a heritage property renovation - was set to yield a net loss of circa $12 million.
DFPs’ alternate development strategy led to a shift away from luxury apartments and towards a more affordable price point, greatly improving the presale rate. We also recommended a staged finance management solution, allowing for a profit yield of $7.2 million.
If you’re a developer whose project is negatively affected by current market conditions, it is important to act now.
Contact our expert team for early advice on completing your project or managing unmeetable funding obligations. We can help you mitigate losses and find a tailored lending solution.