How Is Property Development Finance Priced?
In our last blog, we covered the main risk factors that are looked at when assessing a project:
- Market risk
- Developer risk
- Construction risk
- Project risk
- Legal risk
- Regulatory risk
- Site risk
- Reputational risk
These factors are also what lenders use to measure their pricing for a project. In general, a project with lower risk will be priced more competitively than a project with higher risk.
Bank funding vs. non-bank funding when financing a property development
Bank funding is considerably cheaper than non-bank funding in this space, as the banks will only fund projects that have heavily mitigated their risk factors.
Non-bank funding, while more expensive, also has a vital place in the industry as it is often difficult to meet bank criteria. This means there can be a high cost in delays while trying to mitigate all the problems that come with bank funding.
Furthermore, just as lenders will charge more for taking higher risks, there can be higher rewards for developers in taking more risk – for example, the return on capital on borrowing higher amounts.
Generally, the cost of obtaining development funding will consist of the following fees:
- Application Fees
- Interest Rate
- Line Fees or Management Fees
- Valuation Fees
- Quantity Surveyor Report Fees
- Legal Fees (lender and borrower)
- Broker Fees
Other things to keep in mind when obtaining finance for your property development
Unlike bank funding, which is generally priced as a margin over inter-bank rates, private lending rates are only loosely related to the general price of money and is their own contained market.
The primary driver is the demand in the investor space to get their money out and the cost of returns. For example, if it takes a rate of 7% to get investors on your deal, you will likely be paying 8.5-9% for your money, as the fund manager will be taking 1.5-2% fees on top.
It’s important to note that the pricing is not the only essential component of a loan offer, and the term is equally important. It’s recommended that before committing to any loan facility, the cost of the loan against the project is properly modelled and all of the risks are considered. The pricing structure may significantly affect the overall pricing, and some facilities that appear on the surface to be cheaper may in fact be more expensive.
And finally, in addition to the overall pricing, the terms of the loan must be taken into consideration. Namely:
How quickly do you need funding to occur?
How flexible is the funding?
Is there a minimum interest period?
Speak to MFEG
MFEG specialises in assisting property developers to successfully fund their projects. We’ve established an exceptional track record in achieving excellent outcomes for our clients via First Mortgage, Mezzanine (Second Mortgage) or Preferred Equity, using our extensive panel of funders on a range of different borrowing scenarios.
For more information, get in touch.