CrowdProperty Australia highlights five potential pitfalls for developers
CrowdProperty Australia has identified five potential pitfalls for property developers when it comes to securing commercial loans for project financing.
The Australian division of the UK-based peer-to-peer lending platform said that the “lightly regulated nature of the commercial lending market” in the country can add to the challenges.
Daniel He, property director at CrowdProperty, warned that developers need to make sure the loan term is long enough to cover all their development objectives.
“It’s not unusual to find that commercial loans are too short for developers to complete projects prior to the conclusion of the loan term,” he said. “This could risk suffering high penalty interest rates, which can quickly erode profit.”
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He suggested adding at least one or two months to the project completion time when negotiating the term for commercial loans, and working with a lender that doesn’t charge early exit fees.
Another potential pitfall is understanding gross versus net loans, He said.
“It’s essential for developers to know exactly how much they can borrow, how long they can borrow for, and what the cost of borrowing is, in order to ensure their projects’ bottom line is solid,” he said.
“For this reason, small-scale developers need to be aware of the difference between the net loan, which is the value of the loan that clients can access following deductions, and the gross loan, which is the net loan plus fees and interest.
“If they confuse the two they could end up with fewer funds on hand than they first anticipated.”
Another area for concern is the small print, with He warning that it was critical for developers to seek professional legal advice in order to thoroughly review their loan documents and build contracts.
“A key factor to consider when reviewing small-print legals is how easy it is to default, because once developers default on a loan they can run into penalty rates that rapidly ratchet up the cost of borrowing,” he said.
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On top of that, developers should be well aware of the penalty rates and when they kick in, as these fees can drastically impact the final cost of funding.
“Developers should also seek a lender that is open to providing refinancing when loan terms are about to conclude if projects are not yet completed,” He said. “If they don’t offer that, then consider a lender who can look at refinancing, exit finance, or bridging finance.”
Finally, beware hidden fees. “This is a big one for developers, as hidden fees can add considerably to the cost of financing a project in ways that are not apparent at the outset,” He said. “In fact, that attractive finance deal may not look so good once you take all the hidden fees into account! These hidden charges can include line fees, broker fees, and exit fees.
“Ask about all fees up front and ensure it’s laid out clearly in your loan agreement.”
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