Multi-unit (Construction of 3 or more dwellings) development will either be done under Residential Finance products and rules or under Commercial Finance. Usually the distinguishing factor between which type of finance is used is the number of units being built.
As a general rule:
In most cases, property developers would prefer to obtain Residential Finance as it is far cheaper and less onerous in its requirements than Commercial Finance.
Residential finance is relatively simple & the process is similar to any house & land construction. Commercial finance options are usually more complicated. Below we explain the different finance process between residential and commercial loans for developments.
Commercial finance usually entails an:
Commercial finance usually require presales on the project.
Only a small number of lenders accept no presales, but borrowers will usually need to demonstrate the ability to meet repayments on the end debt without the use of proposed rental income. This is typically very difficult to do, unless income position is very strong. Under residential finance you do not require presales and you can use the proposed rental income of the dwellings. This makes the qualifying criteria for residential finance easier.
Normally residential lending is 80% of the “as is” or “in one line” valuation. This means that the valuer will value the construction as if you are building 3-4 dwellings on one title, rather than separately titled dwellings.
These valuations are usually 15-20% below the actual value of the project.
Therefore, the actual LVR based on the ‘end value’ of the completed development on residential finance is somewhere between 65-70% of the end value.
Commercial finance is up to 70% of the ‘end value’ of the project. Commercial lending allows developers to capitalise the interest but this is factored into the LVR.
Despite there being a lower LVR being provided under Commercial Finance arrangements, the amount of money lenders are willing to provide is usually higher with Commercial Finance arrangements, meaning less capital is required by property developers.
Here is an example of the total funds that a lender will allow on a total project cost of $2million with an end value of $2.4million.
In this example, the property developer requires $144,000 less capital to complete the project under Commercial Finance relative to Residential Finance. This is usually one of the key benefits of going down the Commercial Finance route, and why some investors seek this path, even if they meet residential finance requirements.
|Valuation type||In one line||End Value|
|Total loan amount||$1,536,000||$1,680,000|
|Total capital required||$464,000||$320,000|
|Difference in capital||$144,000|
When it comes to commercial finance lenders take a more stringent approach to the application. As a minimum they will require the following information:
Under residential finance, the rules are more ‘black or white’. You either meet the eligibility criteria or you don’t. The same rules for approving applications that we have unpacked apply.