Mezzanine Financing Pros

If you’re raising capital to fund your project development, you may want to consider using mezzanine loan as part of your financing solution.

Mezzanine financing is a useful tool to fund developments, expansions or property acquisitions or completing a construction project. You can use it in combination with equity financing, line of credit, term loans, or as a substitute for bank loans. In a capital structure, it sits above equity financing.

Here are the benefits of using mezzanine finance:

  • It is cash-flow based. While banks look into your collateral, mezzanine investors look into your cash flow.  Traditional lenders focus their evaluation on your assets and financial documents when evaluating your loan application, so when borrowers lack tangible collateral and proof of higher income, banks won’t approve their application. On the other hand, mezzanine financing lenders often lend money to businesses with sufficient cash flow available to pay the interest and principal payments when they fall due.
  • Interest only capital. Mezzanine loans are flexible. It requires no immediate principal payments. Its interest-only capital feature with balloon payment upon maturity, allows you to use the money that would have gone to making the payments and use it to complete your project.
  • It has a longer maturity than bridge loan and other short term loans. Developers looking for long-term with a maturity of five years or morecan enjoy this long term financing option. You don’t have to worry about paying this loan back in the short term.
  • It is a reliable alternative funding source for borrowers seeking to finance property development, especially those that do not qualify for traditional bank loans with tougher capital regulatory requirements.

Windsor Capital assists lenders facing lending problems, as bank lenders increase regulation on development loans. We help fill the void for developers looking for funds to start and complete their projects in Melbourne.

Important Features of Commercial Loan for Property Developers

Property developers looking to refinance or purchase commercial property can apply for commercial property finance both for small and big projects.

Is commercial loan similar to commercial mortgage? No. A commercial mortgage is a type of mortgage loan secured by a commercial property. Its main purpose is to purchase, redevelop or refinance a commercial property.  On the other hand, conventional commercial loan is a short term financing mainly used for the purchase of equipment, funding for payroll and other basic operational needs. But, there are specialized lenders offering commercial loans for development projects.

Here are the typical features of a commercial loan:

Loan term The most common commercial loan term is 15 years. But, the collateral you offer to the bank has a huge impact on the term of your commercial loan. For example, those who secure their loans with a residential property can obtain up to 30 year loan term. If you use your commercial property as security the lender may approve a 20-25 year term. You can also opt for shorter term development loans and bridging loans for smaller loan amount.

Loan Amount How much you can borrow depends on two factors:

  1. Loan to value ratio. It is the percentage of the property value (LVR) which is determined by the security of the loan. The LTV is commonly used by lenders as a lending risk assessment tool to examine if a borrower is high risk or not.

    Formula Mortgage amount divided by the appraised value of the property is equal to the loan to value ratio. For example, if the mortgage costs $500,000, and you divide it with the appraised value of your property which is $250,000, your home to value ratio is 2.  The higher the LTV ratios, the higherthe risk and, therefore, the more costly it is for the borrower. You can still get affordable interest rates if you buy mortgage insurance to offset the risk to the lender.

  2. Repayment capacity. Lenders measure your ability to generate enough funds to make debt repayments on time. That’s why mainstream lenders and banks require financials such as income tax returns for the past three years, books of accounts and other proof of income to gain an insight into your business’s ability to generate income. They often use this to conduct a cash flow analysis to be certain that you can meet your financial obligations over the period of the loan.

Windsor Capital can help you find affordable and ‘quick approval’ commercial loans suitable to your development needs and then guide you through the intricate processes of commercial loans and commercial mortgages.

Tips When Calculating your Costs before Starting a Development Project

Before applying for a commercial mortgage to fund your development project In Melbourne, make sure you conduct a ‘needs-assessment’ or a thorough analysis of your financing needs first.

Step 1. Calculate the costs associated with the stages of development of a project.

  1. Pre-development stage (or the planning phase): It may include the appropriate filing fees, regulatory fees, legal fees and other expenses incurred in the formation of your organization or startup. Pay particular attention to acquisition options, marketing costs and the costs of securing loans for your project.
  2. Development stage: It is the longest and the hardest stage when accounting for management and cost control is very important. Prepare a comprehensive budget with estimated amounts for each of the cost category with your team. The finance, construction, and management team must work together during this phase for you to come up with a reasonable budget.
  3. Post-development stage: When the project is noticeably complete, you still need money to prepare it for its intended use. Before the buyers or lessees can move in, you may have to pay for real estate taxes, broker’s fee and attorney’s fee. You may also have to pay for certain improvements to make it habitable, such as utilities, cleaning and security.

Step 2: Study various loan options. Compare offers from banks, online lenders and other financing companies to find the loan with the lowest interest rate. You can choose between fixed or variable interest rate, depending on your capacity to pay and financing needs. Ask about repayment options, pre-payment penalty and the existence of any borrower protections.

Step 3: Make sure that the cost of the loan is reasonable enough

Developers should make a profit from project not only because the property market is good, but because they don’t have to spend a huge amount of money in repaying the loan used for the project.

Let’s say, you took out a property development loan amounting to $500,000, minus $50,000 interest, to purchase a property for $200,000. If you spent $300,000 developing it, and sold it for $1, 000,000 with a significant rise in property prices; your efforts made you $450,000.

In the example above, it is obvious that the profit margin is substantial. But, if you will spend too much on the overall interests of the loan, you may end up with a thin profit margin.

Are you planning to start a property development project in Melbourne? Windsor Capital can guide you all throughout the stages of your property development project. 

Melbourne Housing Prices Keep Rising

Known as the city of cutting-edge architecture, spacious parks and gardens and a prime spot for water activities, Melbourne is also pegged as Australia’s hottest property hotspot.

Melbourne’s property market is expected to perform better than most locations in Australia this year as the asking price of houses in the city reached its highest pick. The latest weekly SQM Research data reveals that the median asking price in the city exceeds 1 million for the first time. This continuous decline of more affordable houses is an opportunity for property developers to build residential properties that will cater to a huge number of potential renters.

Across the city –developers have huge opportunities to build investment units, residences, and commercial spaces for the locals and foreign investors. However, as the lending policies tighten across the country, it’s still frustrating to witness small and largerdevelopers fall into the lending traps that consequently take huge cuts to their revenues. Since banks are declining many property development loans and commercial mortgages, many investors are prone to predatory lending practices by loan sharks offering quick loan approval. Anyone that falls into this trap either didn’t do enough research about the lending market in Australia, or doesn’t have the access to reputable financing advisers to help them navigate the strict lending market.

Windsor Capital understands how development works and how to increase a developer’s borrowing power in the midst of a tough lending environment. We provide solid advice and assistance to get the right financing for your project.

Common misconceptions of private lending

Many developers and investors shy away from private lending due to a number of misconceptions. A common perception is that private lending is slow, expensive and inflexible.

Many of these misconceptions have grown in the past year or two as many inexperienced lenders entered the market without the resources to deliver on funding promises.

In the past few months many of these novice lenders have exited the market clearing the way for better outcomes from experienced finance businesses. In the right hands private lending is much faster than banks, however, you do need to take the right approach to secure finance from the sector.

Private lenders assess each transactions on its merits rather than take the pigeon-holed approach with a fixed credit policy that is typical of the banks. And it is not subject to the whims of banking policy.

For example, pre-sales are not a prerequisite for private finance. The banks’ slow approvals process also presents a major opportunity cost for developers who can wait up to 6 months or more for a finance approval. Private lending can deliver funds in a fraction of that time getting your project to market faster. This approvals flexibility addresses the perception of private lending being more expensive.

While the interest rates are higher than the banks, starting your project earlier in the cycle may in fact increase your profits at the backend of the transaction as it allows you to be first to market. And it is usually a short term loan (6-24 months) so the impact of the higher rates (that are now more competitive than ever) is not as profound.

In fact private lending is frequently used as a bridge to bank finance. In addition, private lending is streamlined and has a more direct approval system – you deal with the people making the decision.

Banks frequently overcomplicate transactions and this non-commercial approach does not deliver the transparency developers require. With private lending your contract is fixed and you get certainty of outcomes.

Windsor Capital offers:

  • Loan size from $1.5 million to $30 million.
  • No vendor costs are involved until approval is issued
  • Loan amount can be inclusive of all loan costs and interest.
  • Nominated brokerage fee paid on the day of settlement.
  • Interest rate from 7.95%.
  • All applications considered on the day they are received
  • Staged funding available on large projects.

It’s time to start planning for the upturn

Every property developer knows you can’t pick the bottom or the top of the market.

While some pessimists are calling this is a “dead cat bounce” others are starting to see sunshine over the horizon.

We believe the market is in the early recovery mode and it is time to start planning for the next upcycle.

The roadblock at the moment is the banks (still!) who won’t lend on anything without 110% sales. (That’s 100 per cent sales plus GST plus sales commission.)

This is compounded by the valuation industry still taking a grim view of the prices paid over the past 2-3 years and the banks enforcing their LVRs.

So where is the upturn going to come from?

I know a number of major developers that are seeking sites again – a clear sign the market is setting the foundations for the 2020s.

Plus there is a finite amount of stock in the market and underlying demand is starting to accelerate again.

Once this stock is whittled down prices will stabilise and then start to climb again.

It is time to start planning for the upturn.

If you are seeking construction finance Windsor Capital is offering No Presale Construction Finance on terms up to 24 months.

This is designed to allow developers with quality sites the chance to return to the market and position themselves for the recovery.

If you wait too long you will miss this key opportunity.

Will you be ready to cash in?

Private interest rates fall in competitive market

Interest rates in the private debt funding market has dropped significantly, despite banks closing their lending to property investors said Chrish Samuel Managing Director of Windsor Capital Management.

Mr. Samuel said more than a billion dollars has poured into the short-term debt market pushing interest down to recent lows as the weight of money flowed into the sector.

He has witnessed rates fall from 12% pa in early 2018 to rates from 7.95% pa today for property backed debt.

“This has allowed breathing room for property developers to restructure their developments in a tightening property market and has gone some way to securing their financial position,” he said.

Mr. Samuel said Windsor Capital Management has lent in excess of $275 Million in the past 12 months to experienced property developers with a track record, with no upfront pre-sale requirements, however borrowers are required to make pre-sale commitments during the course of construction.

“The flow of private capital into the debt market has been extraordinary, as cashed up investors have decided lending is offering better returns than other financial asset classes.

“I believe we are going to see banks continue to tighten lending parameters for some time, which will push more developers and investors into the private debt market,” Mr Samuel said.

Windsor also lends funds to developers and investors looking to landbank properties along with mezzanine debt.

“There has been a surge in investors and developers seeking landbank funding as banks withdraw from the market. We are seeing banks lending as little as 20%-30% of valuation or refusing to fund experienced developers and investors altogether,” he said.

Windsor Capital Management has been lending to property developers and property investors for a decade and has prided itself on its innovation and an entrepreneurial philosophy by going against the grain.

By adopting a conservative lending policy Windsor Capital Management has provided secured returns to some of Australia’s wealthiest individuals and family offices.