Leap two hurdles with one loan

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How a hybrid solution can overcome construction challenges.

Construction delays and material shortages. Cost over-runs and labour restrictions. Off-the-plan marketing limitations during lockdowns. The pressure on developers has been immense in the past two years – and while COVID has certainly exacerbated these issues, supply chains aren’t likely to return to normal any time soon.

How a hybrid solution can overcome construction challenges

How a hybrid solution can overcome construction challenges

Construction delays and material shortages. Cost over-runs and labour restrictions. Off-the-plan marketing limitations during lockdowns. The pressure on developers has been immense in the past two years – and while COVID has certainly exacerbated these issues, supply chains aren’t likely to return to normal any time soon.

How a hybrid solution can overcome construction challenges

It’s not surprising to see many development projects reach full term on their funding – yet they still have three months of construction to complete, and apartments remain unsold. That results in the existing lender applying penalty interest and the builder pressed to sell their apartments at a discounted rate to achieve their pre-sales targets. This leads to additional pressure for the developer and builder, plus the unnecessary erosion of their equity.

The challenge is, most lenders are reluctant to step in and refinance halfway through construction. A development exit loan usually happens at the latter stages of a project, while a residual stock loan typically requires an occupation certificate (full completion).

At Assetline Capital, we knew there had to be a better way to provide certainty and help developers see their projects all the way through to success. So we’ve developed a hybrid solution: combining construction finance and a residual stock loan in one simple facility, preserving developer equity through the establishment of a single facility.

Instead of paying two sets of fees, going through that process twice – potentially with two different lenders – the developer could have immediate peace of mind knowing he could preserve his profit targets and equity.”

Andrew Vamvakaris, Victorian Director

Packaging up a simpler solution

Assetline Capital Director Andrew Vamvakaris was talking with a broker in 2021, when he had a lightbulb moment.

“He was telling me about a client with a development in Brighton. Eight luxury apartments, delays on construction due to COVID supply chain issues, and he was now paying penalty rates with the previous lender because his loan had reached full term,” explains Andrew.

The developer needed four more months to complete construction, but he also wanted to wait until the residences were finished to launch to market. If prospective buyers could fall in love with the high-end design and finishes, he could achieve the premium price his vision deserved.

“We are quite unique as a lender, because we are already willing and are able to step in before occupational certificate to provide a residual stock loan,” Andrew says. “So I started thinking, how far could we bring that construction risk assessment forward?”

Partway through construction, it turned out. Assetline Capital’s in-house construction management team understands the current state of a building project, and exactly what needs to be done to complete it. While other lenders are wary of valuing potential residual stock – because there is no value if it doesn’t get finished – Andrew knew his team could quantify that risk.

And that meant he could structure a deal that brought together the two solutions this developer needed, in one cost-effective package.

“This was something that hadn’t really been done before. We could take on an existing construction loan – halfway through the build if necessary – and fund the construction while also providing a residual stock sell down period,” explains Andrew.

Partners in success

Unlike other lenders, Assetline Capital encourages early repayments, which means if developers sell their residual stock sooner, they’ll simply pay less in interest.

“We don’t think we should penalise you for being a good borrower, because we know part of your exit strategy is to keep your profits intact. So we simply set a minimum and maximum loan term. If you repay us early, you’re saving money,” explains Andrew.

We don’t think we should penalise you for being a good borrower, because we know part of your exit strategy is to keep your profits intact. So we simply set a minimum and maximum loan term. If you repay us early, you’re saving money,”

Andrew Vamvakaris, Victorian Director

The Brighton developer was so impressed with this hybrid solution, he took the same approach to complete another development – this time, in Kangaroo Point in Brisbane. “It was the same situation: the project had been delayed and needed another five months to complete. He wanted to retain the unsold apartments so he could show them as completed residences, ready to move in,” says Andrew. “Construction will now be completed in May, and he has just sold the penthouse for a record price in the area.”

The hybrid loan buys the developer time: he has the rest of the year to sell the other four apartments. Plus there is no impact on his day-to-day cash flow. The interest is capitalised into the loan, and he pays it off with the proceeds of each apartment sale. “All we’ve done is combine two products we’re known for, and create a win-win solution that helps developers achieve their goals in the current market,” says Andrew.

If your construction project is under time pressure, please get in touch.

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