Commercial Finance

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We often see small to medium sized property developers struggle for cash flow and, in our experience, it is the single biggest reason for developers going under and as they say, “cash is king”!
The very nature of property development is that a project will only incur costs throughout its lifecycle until the construction is complete, titles are available and the properties are sold and settled.  In most cases, this process takes some 12 to 18 months and that is a long time to be expending money, even if it is borrowed and not receive any income. 
By definition property development is a capital-intensive and cash flow poor industry and developers who don’t have an ancillary business that provides them with an alternative source of income need to work smarter at what they do.
Some property development cash flow strategies to consider
1.    Be smart and replace some of your equity during the project lifecycle
How and when you utilise your capital can greatly reduce the demand on your cash flow and it is important to remember that in most instances, project risk reduces as the project progresses. It therefor follows that the earlier in the project timeline that you borrow money, the more expensive that money will be. 
Obviously, the most capital-efficient way would be to use other people’s money (OPM) as much as possible, however that comes at a cost and delaying the point in time when you ustilise OPM will reduce this cost.
As an example, in the current market environment the cost of funds for any ‘non-mortgage secured’ money i.e. risk equity, will reduce over time as shown below:
2.    Schedule projects efficiently
If you only have enough equity to develop one project at a time the ability to maintain a consistent flow of projects and resultant profits is significantly reduced. By taking advantage of the above principals you may be able to make an “equity redraw” and introduce OPM to replace some of your existing equity once you have secured the development approval and some pre-sales.  This will then allow you to utilise the capital released to secure your next project without having to wait until the current project is completed.
This approach leverages your equity to make it work more efficiently as well as bringing forward the income streams for future projects and there for improving your cashflow by shortening the timing between project completions and the resultant profits.
3.    Keep your overheads low
A very effective strategy many small to medium size Developers use is to engage a multitude of project-specific consultants. By doing this, those consultants are a direct cost to a specific project and the developer avoids carrying ongoing salaries as part of his overheads. In some instances there is also the potential to delay some of the payment for the costs involved to coincide with project milestones further improving the project cashflow.
4.    Include a Development Management Fee
By including a development management fee into your project feasibility, you allow yourself to receive income during the project lifecycle. In many instances, the first mortgage construction finance provider will allow a periodic development management fee to be advanced from the loan as part of the professional fees but remember that it needs to be kept reasonable, reflecting your contribution to the project.
5.    Negotiate your settlement terms
During the early stages of a typical development project lifecycle, the most capital-intensive part will be the settlement of the development site. By negotiating favourable settlement terms, you can potentially delay paying for the property until you have substantially removed the Approval risks associated with it. This in turn will improve the funding costs and the project cash flow in general.
6.    Have a safety net
If possible, have another business that you can operate in parallel with the development operations. This applies more to smaller businesses that are largely undertaking one project as a time and do not have the capital to smooth out the resultant cash flow lumpiness. Having a small income generating business that requires minimal capital and operating overheads such as a real estate rent roll, small equipment hire business or similar means that when the market is in a serious downturn and you need to be able to just “sit on the beach” and wait it out, this alternative income can be a real godsend.
All of this is important but the real challenge is to actually put it into practice. Sitting down with your accountant and lawyer is a good start but they tend to be reactionary and can only provide some of the answers. 
A critical piece of the process is having a clear understanding of the finance and capital structures that are actually available to you and then building your strategy around the reality of those solutions rather than developing a concept and then having to compromise it to meet the market realities. This is where a professional construction finance broker can really add value to your business so the real question is, will you do something about it today or wait until it becomes a regret?
This article was written by Dan Holden of HoldenCAPITAL, who are a bespoke construction finance firm, they arrange construction finance and invest in projects through their equity fund, Queen Street INVEST. To discuss your project finance requirement please call (07) 3171 4200 or visit HoldenCAPITAL <a href="https://www.holdencapital.com.au/" target="_blank">here</a>.
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Cash flow the biggest killer of property developers

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Unlisted property fund manager Quintessential Equity will receive financing of $68 million from the Clean Energy Finance Corporation (CEFC) for its new $120 million green office tower in Victoria’s Geelong. 
The 1 Malop Street development is the largest commercial office project to receive finance by the CEFC, which invests in renewable energy, energy efficiency and low emissions technologies, said a media release.
The financing will help Quintessential Equity in its efforts to get the tower a 5.5 star National Australian Built Environment Rating System (NABERS) base building energy rating, a first for a Victorian multi-storey commercial office building outside of the Melbourne CBD. 
1 Malop Street will be home to WorkSafe Victoria’s headquarters from mid-2018. The 14-level building will merge the heritage Dalgety &amp; Co building into a property consisting of nearly 15,500 square metres of CBD PCA A-Grade office accommodation. 
Quintessential Equity head of development Guy French-Wright said there was a growing demand for affordable high-quality green office space in Geelong. 
“Our 1 Malop Street development will set a new gold standard for near city office accommodation, designed around the ethos of Live, Work, Play,” French-Wright said. 
“Through the support of CEFC we are in a position to improve the building’s energy efficiency from 5 star to a 5.5 star NABERS base building energy rating. This will provide an opportunity to achieve an additional 25 per cent reduction in the building’s energy consumption and provide additional cost savings for all tenants.” 
CEFC chief origination and transactions officer Paul McCartney said the financing commitment reflected the CEFC’s role in driving increased investment and innovation in building sustainability. 
The new building will offer 14 levels of office space and include a ground-floor café and rooftop exercise areas.
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Quintessential Equity gets $68 million from CEFC for green office tower in Geelong

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Former prime minister Paul Keating has joined leading commercial financier MaxCap as a stakeholder and board member, as it looks to fill the gap in commercial lending left by banks' tightening criteria. 
MaxCap, which manages more than $3 billion of commercial real estate mortgages, claims to be leading the charge on super funds investing in lucrative commercial real estate lending.
MaxCap managing director and founding partner Wayne Lasky was cited by Fairfax Media as saying that Keating was providing strategic advice and had invested in the business.
Keating, who was PM from 1991 to 1996, recently said if a decision was taken to allow young Australians to access their superannuation to buy a house, it would “rob them” of savings later in life and called it an “irresponsible idea” in an opinion piece on Fairfax Media.
MaxCap group recently teamed up with Australia’s biggest industry super fund, Australian Super, to offer large $100 million-plus loans direct to developers.
Keating joined MaxCap late last year as a director.
The former PM's government was behind the 1992 creation of Australia's compulsory employer contribution scheme that now looks after $2 trillion in superannuation retirement savings.
"If a former head of state seeks to take an investment in a business, they do even more due diligence than institutional investors. Paul carefully guards his legacy, and rightfully so. Having done that work with us, he wanted to get a stake. We're happy to accommodate it," Lasky said.
"It's a big shot in the arm to the sector. When you've got the big instos [institutional investors] participating and you've got the former prime minister participating, you can see where it's moving to in the future."
MaxCap focuses on filling the gap in commercial lending left by the banks after the Australian Prudential Regulatory Authority tightened rules in the wake of the global financial crisis.
Lasky said Australia's commercial property lending was a $220 billion market, with more than 80 per cent of funding dominated by the big four banks.
APRA's imposition of stricter international Basel banking requirements will shrink the bank's market share and open up a $30 to $40 billion funding gap, he said.
"There's a structural dislocation which has been taking place since the crisis. If you've got the capital, there's pretty good lending to be done," Lasky said.
MaxCap placed $300 million in private funds through first mortgage lending over six months to December last year.
It also raised and placed $50 million in the first tranche of a $100 million first mortgage fund, with another raising expected in the next two months, he said.
A spokesman for Keating said the former PM believed it was the right time to invest into MaxCap's platform which was well placed to take advantage of the structural opportunity as the banks were obliged to withdraw from commercial funding due to Basel III and IV guidelines.
The MaxCap website is <a href="https://www.maxcapgroup.com.au" target="_blank">available here</a>.
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Former PM Paul Keating takes stake, joins board of commercial financier MaxCap

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A senior industry executive has come out with a book on the predatory lending practices within the commercial finance sector.
The book, Get a Second Opinion before You Sign by Shane Reynolds of Reynolds Private Wealth, is about first and second tier lending, construction finance, preferred equity and distressed debt transactions.
Reynolds told the Australian Broker that the book attempts to “lifts the curtain” on under-the-table practices occurring in an unregulated industry with no consumer protection.
It targets the dual audience of consumers and mortgage brokers.
“I’ve always believed in giving the intellectual property to the people,” he was quoted by Australian Broker. 
“I had a number of fund managers tell me not to publish the book because it would take away an element of my advisory and their advisory business. They said I was giving the keys away; that clients would scrutinise our letters of offers and mandates. If you truly have a good business model then you shouldn’t concern yourself with the fine print. You should concern yourself with delivery.”
The book explains the steps in the preparation of a mortgage application and the process for successfully obtaining a commercial loan.
Reynolds said that “every broker in Australia should read this book 1) for product knowledge and 2) for developing that additional income stream and skillset to say to clients that you understand commercial loans”.
Unable to get loans from the banks, borrowers are “already distressed” before entering the unregulated commercial finance sector, Reynolds said. A further lack of knowledge from consumer and broker can put the borrower in a more vulnerable state.
“It depends on the desperation of the borrower as to the terms and conditions that they’re offered. You may find yourself in a situation where if you don’t fulfil your obligations under the agreement, you’ll have a caveat or mortgage on your property for fees. Unless you’re very well versed in commercial litigation, often you’re either faced with settlement provisions, terms with the lender or broker, or they simply enforce their position and sell you up.”
One common practice, according to Reynolds is called a “set up to fail” agreement in which the lender knows the borrower will default, using this as a way to create a deed of forbearance.
“Lending money is no longer built on the premise of receiving interest. It’s become about receiving interest and then taking the client’s security when their mortgage goes into default,” he said.
Aware of the client’s asset position, a lender may create a deed of forbearance, inserting additional security including a selection of properties that the client has in their portfolio.
“The moment the 60 days is up on the deed of forbearance, the lender then has rights against all those other properties as well. No one in their right mind would sign these agreements but borrowers are so in distress that they don’t know the difference.”
He said the commercial market lacked aggregators or franchises such as Yellow Brick Road or Mortgage Choice in the commercial space, so residential mortgage brokers need to be doubly aware when seeking information in the opaque world of commercial finance, he said.
“If you’re going to deal with these people, then just beware of the fine print. Get a second opinion from your lawyer before you sign anything and if there are nasty clauses in those agreements, strike them out.”
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